G.R. No. 146984 ; July 28, 2006
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK) and NATIONAL DEVELOPMENT COMPANY, respondents.

FACTS

Pursuant to a government privatization program, the National Development Company (NDC) offered for public bidding its shares in a subsidiary and five vessels. The winning consortium, composed of Magsaysay Lines, Inc., Baliwag Navigation, Inc., and FIM Limited, purchased the assets. The contract stipulated that any value-added tax (VAT) would be for the purchaser’s account. The Bureau of Internal Revenue (BIR), through several rulings, held the sale subject to 10% VAT, characterizing it as a transaction “deemed sale” under revenue regulations due to a change in business ownership. Consequently, NDC drew on a letter of credit provided by the purchasers and paid the VAT amounting to P15,120,000. The private respondents then sought a refund before the Court of Tax Appeals (CTA).
The CTA granted the refund, ruling the sale was an isolated transaction not in the course of NDC’s trade or business and thus not subject to VAT. The Court of Appeals initially reversed, agreeing the sale was isolated but finding it fell under “deemed sale” rules. Upon reconsideration, the appellate court reinstated the CTA’s decision, prompting the Commissioner of Internal Revenue to elevate the case to the Supreme Court.

ISSUE

Whether the sale of the vessels by NDC is subject to value-added tax.

RULING

No, the sale is not subject to VAT. The Supreme Court affirmed the rulings of the lower courts, holding that VAT is a tax on transactions undertaken in the course of trade or business. The Court examined NDC’s charter and found its primary purpose was to undertake a developmental or investment role in the economy, not to engage in the regular conduct of commercial shipping or the routine sale of vessels. The sale was an isolated transaction executed as part of a sovereign-mandated privatization program. Since the transaction was not in pursuit of NDC’s ordinary trade or business, it falls outside the scope of VAT under Section 99 of the National Internal Revenue Code.
The Court rejected the Commissioner’s argument that the sale was a “deemed sale” under the revenue regulations. The “deemed sale” provisions apply only to VAT-registered persons and presuppose that the assets were previously used in, or held for use in, a VAT-taxable business. NDC’s vessels were not held as ordinary assets for sale in the regular course of business but as capital assets related to its investment activities. Therefore, the “deemed sale” rules, including those triggered by a change of ownership, are inapplicable. The payment of VAT was erroneous, and the refund to the private respondents was proper.