Contex Corporation vs. CIR and legally liable for the payment of the tax.

and legally liable for the payment of the tax. What is shifted only to the
Facts
 Contex corporation is a domestic corporation engaged in the business of
manufacturing hospital textiles and garments and other hospital
supplies for export.
o Their place of business is in the Subic Bay Freeport Zone, duly
registered with the SB Metropolitan Authority.
o As such, it’s exempt from all local and national internal revenue
taxes except for preferential tax under RA 7227.
o It’s also registered with BIR as a non-VAT taxpayer.
 Contex purchased various supplies and materials necessary for its
manufacturing process. Taxes were shifted to it – 549,411 and 504k
which it paid
o Thinking na it’s exempt, Contex filed two applications for tax
refund/credit for what it had paid.
o Revenue District Officer Carlos denied it.
o Another application – Regional Director of the BIR didn’t reply!
 Matter was raised to the CTA – partial refund granted
o CTA ruled that the provisions in the NIRC re: exemption only
apply to registered VAT Taxpayers whose sales are zero-rated
as opposed to Contex who is a non-vat taxpayer, being exempt
therefrom
o CTA- nonetheless exempt from input tax on what it bought –
supplies and materials.
 CA reversed the CTA – no refund granted
SC
VAT is an indirect tax. As such, the amount of tax paid on the goods, properties
or services bought, transferred, or leased may be shifted or passed on by the
seller, transferor, or lessor to the buyer, transferee or lessee. Unlike a direct tax,
such as the income tax, which primarily taxes an individuals ability to pay based
on his income or net wealth, an indirect tax, such as the VAT, is a tax on
consumption of goods, services, or certain transactions involving the same. The
VAT, thus, forms a substantial portion of consumer expenditures.
intermediate buyer and ultimately to the final purchaser is the burden of the tax
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm.
In contrast, exemption only removes the VAT at the exempt stage, and it will
actually increase, rather than reduce the total taxes paid by the exempt firms
business or non-retail customers. It is for this reason that a sharp distinction must
be made between zero-rating and exemption in designating a value-added tax
While it is true that the petitioner should not have been liable for the VAT
inadvertently passed on to it by its supplier since such is a zero-rated sale on the
part of the supplier, the petitioner is not the proper party to claim such VAT
refund.
Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the
Consolidated Value-Added Tax Regulations provide:
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person,
which is a taxable transaction for VAT purposes, shall not result in any output
tax. However, the input tax on his (PINANGGALINGAN) purchases of goods,
properties or services related to such zero-rated sale shall be available as tax
credit or refund in accordance with these regulations.
Since the transaction is deemed a zero-rated sale, petitioners supplier may claim
an Input VAT credit with no corresponding Output VAT liability. Congruently, no
Output VAT may be passed on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner is
registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt
VAT taxpayer, it is not allowed any tax credit on VAT

Further, in indirect taxation, there is a need to distinguish between the liability

for the tax and the burden of the tax. As earlier pointed out, the amount of tax
paid may be shifted or passed on by the seller to the buyer. What is transferred
in such instances is not the liability for the tax, but the tax burden. In adding or
including the VAT due to the selling price, the seller remains the person primarily
CIR vs Commonwealth Management and Services Corp (COMARESCO) o emphasizing that a domestic corporation that provided
Facts technical, research, management and technical assistance to its
 COMARESCO – domestic corporation, affiliate of Philamlife, organized by affiliated companies and received payments on a
philamlife to perform collection, consultative, and other technical reimbursement-of-cost basis, without any intention of realizing
services including internal auditing of Philamlife. profit, was subject to VAT on services rendered
 BIR issued an assessment to COMARESCO – 251,831 (deficiency VAT)
COMASERCO is arguing that the services it rendered to Philamlife and its Hence, it is immaterial whether the primary purpose of a corporation indicates
affiliates, relating to collections, consultative and other technical assistance, that it receives payments for services rendered to its affiliates on a
including functioning as an internal auditor, were on a "no-profit, reimbursement-on-cost basis only, without realizing profit, for purposes of
reimbursement-of-cost-only" basis. It averred that it was not engaged id the determining liability for VAT on services rendered. As long as the entity provides
business of providing services to Philamlife and its affiliates. COMASERCO was service for a fee, remuneration or consideration, then the service rendered is
established to ensure operational orderliness and administrative efficiency of subject to VAT.
Philamlife and its affiliates, and not in the sale of services.
 Letter protest to BIR denied
 CTA affirmed the CIR
 CA reversed - anchored its decision on the ratiocination in another tax
case involving the same parties, where it was held that COMASERCO was
not liable to pay fixed and contractor's tax for services rendered to
Philamlife and its affiliates. The Court of Appeals, in that case, reasoned
that COMASERCO was not engaged in business of providing services to
Philamlife and its affiliates. In the same manner, the Court of Appeals
held that COMASERCO was not liable to pay VAT for it was not engaged
in the business of selling services.

Issue – W/N COMASERCO is engaged in the sale of services and this thus liable
for VAT?
 COMASERCO contends that the term "in the course of trade or
business" requires that the "business" is carried on with a view to
profit or livelihood.

Held – Liable
 E-VAT law was passed in 1994 and the NIRC of 1997 took effect.
o "The phrase "in the course of trade or business" means the
regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any
person regardless of whether or not the person engaged
therein is a nonstock, nonprofit organization (irrespective of
the disposition of its net income and whether or not it sells
exclusively to members of their guests), or government entity.
 BIR Ruling No. 010-98

COMMISSIONER OF INTERNAL REVENUE,
petitioner, vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE
MARDEN GROUP (HK) and NATIONAL DEVELOPMENT COMPANY,
FACTS:
Pursuant to a government program of privatization, NDC decided to sell to
private enterprises 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 NMC shares and the 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."
On 3 June 1988, private respondent Magsaysay Lines, Inc. (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
(collectively, private respondents).
The implementing Contract of Sale was executed. 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). Private respondents through
counsel received VAT Ruling No. 568-88 from the BIR, holding that the sale of the
vessels was subject to the 10% VAT. The ruling cited the fact that 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]." Private respondents moved for the
reconsideration but the same was denied. It then filed an appeal with the CTA
with a prayer of reversal of the VAT ruling.
PETITIONER’S ARGUMENTS:
The CIR defended the VAT rulings holding the sale of the vessels liable for VAT,
especially citing Section 3 of Revenue Regulation No. 5-87, which provided that
"[VAT] is imposed 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. 5-87. It seems that the CIR particularly
emphasized Section 4(E)(i) of the Regulation, which classified "change of
ownership of business" as a circumstance that gave rise to a transaction "deemed
sale."
ISSUE:
Whether or not the sale of the vessels was a transaction subject to VAT
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 by 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
consume 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 or services by enabling them
to pass on their respective VAT liabilities to the next link of the chain until finally
the ened consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment
bears direct relevance to the tax-payers’ role or link in the production chain.
Hence, the tax is levied only on the sale, barter, or exchange of goods and 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 though 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, should have settled the matter. Since it’s not in the course
of trade or business, it’s not subject to VAT
China Bank vs. CA
CBC is a universal banking corporation. It paid 12 million gross receipts tax on
income from interests on loan investments, commissions, collection charges,
etc.
The CTA, in Asian Banking Corporation vs. CIR ruled that 20% final withholding
tax on banks passive interest income does NOT form part of its taxable gross
receipts.
Chinabank filed with the CIR a claim for tax refund of around 1.1 million from the
12 million it paid. CBC argued that it was not liable for the gross receipts tax -
amounting to P1,140,623.82 - on the sums withheld by the Bangko Sentral ng
Pilipinas as final withholding tax on CBCs passive interest income
Commissioner argued that the final withholding tax on a banks interest income
forms part of its gross receipts in computing the gross receipts tax under the
NIRC.
SC
We rule that the amount of interest income withheld in payment of the 20% final
withholding tax forms part of CBCs gross receipts in computing the gross receipts
tax on banks.
 CTA decision was reversed in Far East Bank vs. Commissioner - the final
withholding tax forms part of the banks gross receipts in computing the
gross receipts tax.
deduction from gross receipts is inconsistent with a law that mandates a
tax on gross receipts, unless the law itself makes an exception
The Tax Code does not also define the term gross receipts for purposes of the
common carriers tax,[36] the international carriers tax,[37] the tax on radio and
television franchises,[38] and the tax on finance companies.[39] All these
business taxes under Title V of the Tax Code are based on gross receipts. Despite
the absence of a statutory definition, these taxes have been collected in this
country for over half a century on the general and common understanding that
they are based on all receipts without any deduction.
 The presumption is that the legislature is familiar with the
contemporaneous interpretation of a statute given by the administrative
agency tasked to enforce the statute. The subsequent re-enactments of
the present Section 121 of the Tax Code, without changes on the term
interpreted by the BIR, confirm that the BIRs interpretation carries out
the legislative purpose.
Besides, there is no double taxation when Section 121 of the Tax Code imposes a
gross receipts tax on interest income that is already subjected to the 20% final
withholding tax under Section 27 of the Tax Code. The gross receipts tax is a
business tax under Title V of the Tax Code, while the final withholding tax is an
income tax under Title II of the Code. There is no double taxation if the law
imposes two different taxes on the same income, business or property.

There are two related legal concepts that come into play in the resolution of the
first issue raised in the instant case. First is the meaning of the term gross
receipts. Second is the determination of the circumstance when interest income
becomes part of gross receipts for tax purposes.

The Tax Code does not define the term gross receipts for purposes of the gross
receipts tax on banks. There is no statutory definition of the term gross receipts.
Absent a statutory definition, the BIR has applied the term in its plain and
ordinary meaning.
 Used to be defined by the Board of Tax Appeals in National City Bank vs
CIR. Reversed in Asian Bank,
 As commonly understood, the term gross receipts means the entire
receipts without any deduction. Deducting any amount from the gross
receipts changes the result, and the meaning, to net receipts. Any