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CIR v. MAGSAYSAY LINES

FACTS:

The National Development Company (NDC) decided to sell its shares in its wholly-owned subsidiary, the National Marine Corporation (NMC). This sale included five vessels owned by NDC, which were initially leased to Luzon Stevedoring Company and later transferred and leased to NMC. The sale was put up for public bidding, and private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares and vessels for P168,000,000.00. The bid was approved and a Contract of Sale was executed between NDC and Magsaysay Lines, stipulating that the value-added tax (VAT), if any, shall be for the account of the purchaser. The Bureau of Internal Revenue (BIR) issued a ruling stating that the sale of the vessels was subject to VAT. Private respondents sought reconsideration, but their motion was denied. Thus, NDC paid the VAT amounting to P15,120,000.00 using the Letter of Credit. Private respondents then filed an Appeal and Petition for Refund with the Court of Tax Appeals (CTA), seeking the reversal of the VAT rulings and the refund of the VAT payment. The CTA granted the petition, ruling that the sale was not subject to VAT as it was an isolated transaction not done in the ordinary course of NDC's business. The Commissioner of Internal Revenue (CIR) appealed this decision to the Court of Appeals, which overturned the CTA's ruling. The Court of Appeals found that the sale fell within the classification of "deemed sale" under Revenue Regulation No. 5-87 and applied the principle of strict construction against the taxpayer.

ISSUES:

  1. Whether the sale of the vessels by the National Development Company (NDC) is subject to value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax Code).

  2. Whether the transaction can be considered a "deemed sale" under Revenue Regulation No. 5-87.

RULING:

  1. The sale of the vessels by NDC is not subject to VAT. The Court affirms the rulings of the Court of Tax Appeals (CTA) and the Court of Appeals, but provides a more unequivocal rationale. The fact that the sale was not in the course of the trade or business of NDC is sufficient to declare the sale as outside the coverage of VAT.

PRINCIPLES:

  • VAT is applied only to sales in the course of trade or business.

  • Transactions deemed sale under Revenue Regulation No. 5-87 are subject to VAT.

  • In case of doubt, tax provisions should be resolved in favor of the taxpayer.