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RepublicofthePhilippines
SUPREMECOURT
Manila
THIRDDIVISION
G.R.No.146984July28,2006
COMMISSIONEROFINTERNALREVENUE,petitioner,
vs.
MAGSAYSAYLINES,INC.,BALIWAGNAVIGATION,INC.,FIMLIMITEDOFTHEMARDENGROUP(HK)and
NATIONALDEVELOPMENTCOMPANY,respondents.
DECISION
TINGA,J.:
TheissueinthispresentpetitioniswhetherthesalebytheNationalDevelopmentCompany(NDC)offive(5)of
its vessels to the private respondents is subject to valueadded tax (VAT) under the National Internal Revenue
Codeof1986(TaxCode)thenprevailingatthetimeofthesale.TheCourtofTaxAppeals(CTA)andtheCourtof
AppealscommonlyruledthatthesaleisnotsubjecttoVAT.Weaffirm,thoughonamoreunequivocalrationale
thanthatutilizedbytherulingsunderreview.Thefactthatthesalewasnotinthecourseofthetradeorbusiness
ofNDCissufficientinitselftodeclarethesaleasoutsidethecoverageofVAT.
ThefactsareculledprimarilyfromtherulingoftheCTA.
Pursuanttoagovernmentprogramofprivatization,NDCdecidedtoselltoprivateenterpriseallofitssharesinits
whollyowned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC
sharesandfive(5)ofitsships,whichare3,700DWTTweenDecker,"Kloeckner"typevessels.1Thevesselswere
constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its
whollyowned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the
NMC.2
TheNMCsharesandthevesselswereofferedforpublicbidding.Amongthestipulatedtermsandconditionsfor
thepublicauctionwasthatthewinningbidderwastopay"avalueaddedtaxof10%onthevalueofthevessels."3
On3June1988,privaterespondentMagsaysayLines,Inc.(MagsaysayLines)offeredtobuythesharesandthe
vesselsforP168,000,000.00.ThebidwasmadebyMagsaysayLines,purportedlyforanewcompanystilltobe
formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong
(collectively, private respondents).4 The bid was approved by the Committee on Privatization, and a Notice of
Awarddated1July1988wasissuedtoMagsaysayLines.
On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, and
MagsaysayLines,BaliwagNavigation,andFIMLimited,ontheother.Paragraph11.02ofthecontractstipulated
that "[v]alueadded tax, if any, shall be for the account of the PURCHASER."5 Per arrangement, an irrevocable
confirmedLetterofCreditpreviouslyfiledasbiddersbondwasacceptedbyNDCassecurityforthepaymentof
VAT,ifany.Bythistime,aformalrequestforarulingonwhetherornotthesaleofthevesselswassubjecttoVAT
hadalreadybeenfiledwiththeBureauofInternalRevenue(BIR)bythelawfirmofSycipSalazarHernandez&
Gatmaitan,presumablyinbehalfofprivaterespondents.Thus,thepartiesagreedthatshouldnofavorableruling
bereceivedfromtheBIR,NDCwasauthorizedtodrawontheLetterofCredituponwrittendemandtheamount
neededforthepaymentoftheVATonthestipulatedduedate,20December1988.6
In January of 1989, private respondents through counsel received VAT Ruling No. 56888 dated 14 December
1988fromtheBIR,holdingthatthesaleofthevesselswassubjecttothe10%VAT.Therulingcitedthefactthat
NDC was a VATregistered 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
appropriableortransferablearesubjecttothe10%[VAT]."7
PrivaterespondentsmovedforthereconsiderationofVATRulingNo.56888,aswellasVATRulingNo.39588

(dated 18 August 1988), which made a similar ruling on the sale of the same vessels in response to an inquiry
from the Chairman of the Senate Blue Ribbon Committee. Their motion was denied when the BIR issued VAT
Ruling Nos. 00789 dated 24 February 1989, reiterating the earlier VAT rulings. At this point, NDC drew on the
LetterofCredittopayfortheVAT,andtheamountofP15,120,000.00intaxeswaspaidon16March1989.
On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by a
SupplementalPetitionforReviewon14July1989.TheyprayedforthereversalofVATRulingsNo.39588,568
88 and 00789, as well as the refund of the VAT payment made amounting to P15,120,000.00.8 The
CommissionerofInternalRevenue(CIR)opposedthepetition,firstarguingthatprivaterespondentswerenotthe
realpartiesininterestastheywerenotthetransferorsorsellersascontemplatedinSections99and100ofthe
then Tax Code. The CIR also squarely defended the VAT rulings holding the sale of the vessels liable for VAT,
especiallycitingSection3ofRevenueRegulationNo.587(R.R.No.587),whichprovidedthat"[VAT]isimposed
on any sale or transactions deemed sale of taxable goods (including capital goods, irrespective of the date of
acquisition)." The CIR argued that the sale of the vessels were among those transactions "deemed sale," as
enumerated in Section 4 of R.R. No. 587. It seems that the CIR particularly emphasized Section 4(E)(i) of the
Regulation,whichclassified"changeofownershipofbusiness"asacircumstancethatgaverisetoatransaction
"deemedsale."
InaDecisiondated27April1992,theCTArejectedtheCIRsargumentsandgrantedthepetition.9TheCTAruled
that the sale of a vessel was an "isolated transaction," not done in the ordinary course of NDCs business, and
wasthusnotsubjecttoVAT,whichunderSection99oftheTaxCode,wasappliedonlytosalesinthecourseof
trade or business. The CTA further held that the sale of the vessels could not be "deemed sale," and thus
subjecttoVAT,asthetransactiondidnotfallundertheenumerationoftransactionsdeemedsaleaslistedeither
inSection100(b)oftheTaxCode,orSection4ofR.R.No.587.Finally,theCTAruledthatanycaseofdoubt
shouldberesolvedinfavorofprivaterespondentssinceSection99oftheTaxCodewhichimplementedVATis
notanexemptionprovision,butaclassificationprovisionwhichwarrantedtheresolutionofdoubtsinfavorofthe
taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March 1997, rendered a Decision
reversingtheCTA.11Whiletheappellatecourtagreedthatthesalewasanisolatedtransaction,notmadeinthe
courseofNDCsregulartradeorbusiness,itnonethelessfoundthatthetransactionfellwithintheclassificationof
those "deemed sale" under R.R. No. 587, since the sale of the vessels together with the NMC shares brought
aboutachangeofownershipinNMC.TheCourtofAppealsalsoappliedtheprinciplegoverningtaxexemptions
thatsuchshouldbestrictlyconstruedagainstthetaxpayer,andliberallyinfavorofthegovernment.12
However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5
February2001.13Thistime,theappellatecourtruledthatthe"changeofownershipofbusiness"ascontemplated
in R.R. No. 587 must be a consequence of the "retirement from or cessation of business" by the owner of the
goods,asprovidedforinSection100oftheTaxCode.TheCourtofAppealsalsoagreedwiththeCTAthatthe
classification of transactions "deemed sale" was a classification statute, and not an exemption statute, thus
warrantingtheresolutionofanydoubtinfavorofthetaxpayer.14
TothemindoftheCourt,theargumentsraisedinthepresentpetitionhavealreadybeenadequatelydiscussed
and refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet the Court finds that
Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT payments, and the subsequent
disquisitionsbythelowercourtsontheapplicabilityofSection100oftheTaxCodeandSection4ofR.R.No.587
areultimatelyirrelevant.
AbriefreiterationofthebasicprinciplesgoverningVATisinorder.VATisultimatelyataxonconsumption,even
though it is assessed on many levels of transactions on the basis of a fixed percentage.15 It is the end user of
consumergoodsorserviceswhichultimatelyshouldersthetax,astheliabilitytherefromispassedontotheend
usersbytheprovidersofthesegoodsorservices16whointurnmaycredittheirownVATliability(orinputVAT)
from the VAT payments they receive from the final consumer (or output VAT).17 The final purchase by the end
consumerrepresentsthefinallinkinaproductionchainthatitselfinvolvesseveraltransactionsandseveralacts
of consumption. The VAT system assures fiscal adequacy through the collection of taxes on every level of
consumption,18yetassuagesthemanufacturersorprovidersofgoodsandservicesbyenablingthemtopasson
theirrespectiveVATliabilitiestothenextlinkofthechainuntilfinallytheendconsumershoulderstheentiretax
liability.
Yet VAT is not a singularminded tax on every transactional level. Its assessment bears direct relevance to the
taxpayers role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its
subsequentincarnations,19thetaxisleviedonlyonthesale,barterorexchangeofgoodsorservicesbypersons
who engage in such activities, in the course of trade or business. These transactions outside the course of
tradeorbusinessmayinvariablycontributetotheproductionchain,buttheydosoonlyasamatterofaccidentor

incident.Asthesalesofgoodsorservicesdonotoccurwithinthecourseoftradeorbusiness,theprovidersof
such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as
againsttheirownaccumulatedVATcollectionssincetheaccumulationofoutputVATarisesinthefirstplaceonly
throughtheordinarycourseoftradeorbusiness.
ThatthesaleofthevesselswasnotintheordinarycourseoftradeorbusinessofNDCwasappreciatedbyboth
theCTAandtheCourtofAppeals,thelatterdoingsoeveninitsfirstdecisionwhichiteventuallyreconsidered.20
WecitewithapprovaltheCTAsexplanationonthispoint:
InImperial 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,prosecutingandcontinuingbusinessbyperformingprogressivelyalltheactsnormallyincident
thereofwhile"doingbusiness"conveystheideaofbusinessbeingdone,notfromtimetotime,butallthe
time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 6089
(1988)]."Courseofbusiness" is what is usually done in the management of trade or business. [Idmi v.
Weeks&Russel,99So.761,764,135Miss.65,citedinWords&Phrases,Vol.10,(1984)].
What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing
business"connotesregularityofactivity.Intheinstantcase,thesalewasanisolatedtransaction.Thesale
whichwasinvoluntaryandmadepursuanttothedeclaredpolicyofGovernmentforprivatizationcouldno
longer be repeated or carried on with regularity. It should be emphasized that the normal VATregistered
activityofNDCisleasingpersonalproperty.21
This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the NDC was
createdfortheprimarypurposeofsellingrealproperty.23
Theconclusionthatthesalewasnotinthecourseoftradeorbusiness,whichtheCIRdoesnotdisputebefore
thisCourt,24shouldhavedefinitivelysettledthematter.Anysale,barterorexchangeofgoodsorservicesnotin
thecourseoftradeorbusinessisnotsubjecttoVAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 587 now relied upon by the
CIR, is captioned "Valueadded tax on sale of goods," and it expressly states that "[t]here shall be levied,
assessedandcollectedoneverysale,barterorexchangeofgoods,avalueaddedtaxxxx."Section100should
be read in light of Section 99, which lays down the general rule on which persons are liable for VAT in the first
placeandonwhattransactionifatall.ItmayevenbenotedthatSection99istheveryfirstprovisioninTitleIVof
theTaxCode,theTitlethatcoversVATinthelaw.BeforeanyportionofSection100,ortherestofthelawforthat
matter, may be applied in order to subject a transaction to VAT, it must first be satisfied that the taxpayer and
transactioninvolvedisliableforVATinthefirstplaceunderSection99.
It would have been a different matter if Section 100 purported to define the phrase "in the course of trade or
business"asexpressedinSection99.Ifthatwereso,referencetoSection100wouldhavebeennecessaryasa
meansofascertainingwhetherthesaleofthevesselswas"inthecourseoftradeorbusiness,"andthussubject
to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 587 elaborate on is not the
meaning of "in the course of trade or business," but instead the identification of the transactions which may be
deemedassale.Itwouldbecomenecessarytoascertainwhetherunderthosetwoprovisionsthetransactionmay
bedeemedasale,onlyifitissettledthatthetransactionoccurredinthecourseoftradeorbusinessinthefirst
place.Ifthetransactiontranspiredoutsidethecourseoftradeorbusiness,itwouldbeirrelevantforthepurpose
ofdeterminingVATliabilitywhetherthetransactionmaybedeemedsale,sinceitanywayisnotsubjecttoVAT.
Accordingly,theCourtrulesthatgiventheundisputedfindingthatthetransactioninquestionwasnotmadeinthe
courseoftradeorbusinessoftheseller,NDCthatis,thesaleisnotsubjecttoVATpursuanttoSection99ofthe
Tax Code, no matter how the said sale may hew to those transactions deemed sale as defined under Section
100.
Inanyevent,evenifSection100orSection4ofR.R.No.587weretofindapplicationinthiscase,theCourtfinds
the discussions offered on this point by the CTA and the Court of Appeals (in its subsequent Resolution)
essentiallycorrect.Section4(E)(i)ofR.R.No.587doesclassifyasamongthetransactionsdeemedsalethose
involving"changeofownershipofbusiness."However,Section4(E)ofR.R.No.587,reflectingSection100ofthe
Tax Code, clarifies that such "change of ownership" is only an attending circumstance to "retirement from or
cessation of business[, ] with respect to all goods on hand [as] of the date of such retirement or cessation."25
Indeed, Section 4(E) of R.R. No. 587 expressly characterizes the "change of ownership of business" as only a
"circumstance"thatattendsthosetransactions"deemedsale,"whichareotherwisestatedinthesamesection.26
WHEREFORE,thepetitionisDENIED.Nocosts.

SOORDERED.
Quisumbing,Chairman,Carpio,CarpioMorales,Velasco,Jr.,J.J.,concur.

Footnotes
1Rollo,p.58.
2Id.
3Id.
4Id.at59.
5Id.at60.
6Id.at61.
7Id.
8PrivaterespondentsalsofiledtheirclaimforrefundwiththeBIRon13July1989.Id.at63.
9DecisionpennedbyAssociateJudgeConstanteC.Roaquin,concurredinbyPresidingJudgeErnestoD.

AcostaandActingAssociateJudgeStellaDadivasFarrales.
10TheCourtofAppealsinitiallydismissedtheCIRsPetitionforReviewasithadbeenfiledbeyondthe

reglementaryperiodofappeal,butsuchdismissalwassubsequentlyreconsidered.Theallowanceofthe
appealwasthesubjectofaspecialcivilactionforcertiorarieventuallydeniedbytheCourtinMagsaysay
Lines,etal.v.CourtofAppeals,329Phil.310(1996),adecisionlimitedsolelytotheproprietyofthe
allowanceoftheCIRsappeal,withoutdelvingonanyoftheissuesnowsubjectforresolutioninthepresent
petition.
11DecisionpennedbythenAssociateJustice(nowSupremeCourtAssociateJustice)RomeoJ.Callejo,

Sr.,andconcurredinbyAssociateJusticesGloriaC.ParasandRubenT.Reyes.
12SeeRollo,pp.5354.
13Seeid.at31.ResolutionalsopennedbythenAssociateJustice(nowSupremeCourtAssociateJustice)

RomeoJ.Callejo,Sr.,andconcurredinbyAssociateJusticesRamonMabutas,Jr.andRubenT.Reyes.
14Id.at3335.
15SeeCommissionerofInternalRevenuev.BenguetCorporation,G.R.Nos.134587&134588,8July

2005,463SCRA28,42.
16"[T]heamountoftaxpaidmaybeshiftedorpassedonbythesellertothebuyer.Whatistransferredin

suchinstancesisnottheliabilityforthetax,butthetaxburden.InaddingorincludingtheVATduetothe
sellingprice,thesellerremainsthepersonprimarilyandlegallyliableforthepaymentofthetax.Whatis
shiftedonlytotheintermediatebuyerandultimatelytothefinalpurchaseristheburdenofthetax."Contex
Corporationv.CommissionerofInternalRevneue,G.R.No.151135,2July2004,433SCRA376,385,
citingDeoferio,Jr.andMamalateo,TheValueAddedTaxInThePhilippines3536(1sted.2000).
17"ThereisanotherkeycharacteristicoftheVATthatnomatterthenumberoftaxabletransactionsthat

precedethefinalpurchaseorsale,itistheenduser,ortheconsumer,thatultimatelyshouldersthetax.
Despiteitsname,VATisgenerallynotintendedtobeataxonvalueadded,butratherasataxon
consumption.Hence,thereisamechanismintheVATsystemthatenablesfirmstooffsetthetaxtheyhave
paidontheirownpurchasesofgoodsandservicesagainstthetaxtheychargeontheirsalesofgoodsand
services."AbakadaGuroPartyListv.Ermita,G.R.Nos.168056,168207,168461,168463,168730,1
September2005,469SCRA1,282,J.Tinga,DissentingandConcurringOpinion.
18"TheVATsystemassuresthatthegovernmentshallreapincomeforeverytransactionthatishad,and

notjustonthefinalsaleortransfer."Ibid.

19See,e.g.,Section105,RepublicActNo.8424(NationalInternalRevenueCodeof1987).Thesaid

provisionremainedintactdespitethepassageofRepublicActNo.9337,whichexpandedthecoverageof
theVAT,in2005.
20Seerollo,p.51.
21Id.at6970,emphasisomitted.SeealsoCommissionerofInternalRevenuev.CourtofAppeals,385

Phil.875(2000)."VATisataxontransactions,imposedateverystageofthedistributionprocessonthe
sale,barter,exchangeofgoodsorproperty,andontheperformanceofservices,evenintheabsenceof
profitattributablethereto.Theterm"inthecourseoftradeorbusiness"requirestheregularconductor
pursuitofacommercialoraneconomicactivity,regardlessofwhetherornottheentityisprofitoriented."
Id.at884.
22Pres.DecreeNo.1648,entitledReorganizingtheNationalDevelopmentCompanyandEstablishinga

RevisedCharterTherefor,dated25October1979.
23SeePres.DecreeNo.1648,Secs.2and4.
24Notably,theCIRevenexpresslysubmitsthattheearlierdecisionoftheCourtofAppeals,whichdidrule

thesaleasanisolatedtransaction,"iscorrect."Seerollo,p.27.
25SeeSection100(b)(3)(4),1986TaxCode,whichreads:"Retirementfromorcessationofbusiness,with

respecttoinventoriesoftaxablegoodsexistingasofsuchretirementorcessation."
26Section4ofR.R.No.587states:

SEC.4.Transactions"deemedsale."Thefollowingtransactionsare"deemedsale"pursuantto
Section100(b):
(a)Transfer,useorconsumption,notinthecourseofbusiness.Transferofgoodsnotinthecourse
ofbusinesscantakeplacewhentheVATregisteredpersonwithdrawsgoodsfromhisbusinessfor
hispersonaluse
(b)Distributionortransfertoshareholdersorinvestorsasshareintheprofitsofthebusiness
(c)Transfertocreditorsinpaymentofdebtorobligation
(d)Consignmentofgoodsifactualsaleisnotmadewithin60daysfollowingthedatesuchgoods
wereconsigned.Consignedgoodsreturnedbytheconsigneewithinthe60dayperiodisnotdeemed
soldand
(e)Retirementfromorcessationofbusinessordeathofanindividualwithrespecttoallgoodson
hand,whethercapitalgoods,stockintrade,suppliesormaterialsasofthedateofsuchretirementor
cessation,whetherornotthebusinessiscontinuedbythenewownerorsuccessor,estateorheir.
Thefollowingcircumstancesshall,amongothers,giverisetotransactions"deemedsale"forthe
purposesofthisSection:
i.Changeofownershipofbusinessorincorporationofthebusinessinthecaseofasingle
proprietorship
ii.Dissolutionofapartnershipandcreationofanewpartnershipwhichtakesoverthe
businessand
iii.DeathofanindividualwhoisaVATregisteredperson,eveniftheestateorheirsofthe
decedentshallcontinuetooperatethebusiness.
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