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Pirovano v.

CIR (14 SCRA 232)


Sec. 32[B] of the NIRC provides that Gifts, bequests and devises are excluded from gross income
liable to tax. Instead, such donations are subject to estate or gift taxes. However, if the amount is
received on account of services rendered, whether constituting a demandable debt or not (such as
remuneratory donations under Civil Law), the donation is considered taxable income.
Facts: De la Rama Steamship Co. insured the life of Enrico Pirovano who was then its President and
General Manager. The company initially designated itself as the beneficiary of the policies but, after
Pirovanos death, it renounced all its rights, title and interest therein, in favor of Pirovanos heirs.
The CIR subjected the donation to gift tax. Pirovanos heirs contended that the grant was not subject
to such donees tax because it was not a simple donation, as it was made for a full and adequate
compensation for the valuable services by the late Priovano (i.e. that it was remuneratory).
Issue: WON the donation is remuneratory and therefore not subject to donees tax, but rather
taxable as part of gross income.
Held: No. the donation is not remuneratory. There is nothing on record to show that when the late
Enrico Pirovano rendered services as President and General Manager of the De la Rama Steamship
Co. and was largely responsible for the rapid and very successful development of the activities of the
company", he was not fully compensated for such services. The fact that his services contributed in a
large measure to the success of the company did not give rise to a recoverable debt, and the
conveyances made by the company to his heirs remain a gift or a donation. The companys gratitude
was the true consideration for the donation, and not the services themselves.

G.R. No. L-19865

July 31, 1965

MARIA CARLA PIROVANO, etc., et al., petitioners-appellants,


vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.
Angel S. Gamboa for petitioners-appellants.
Office of the Solicitor General for respondent-appellee.
REYES, J.B.L., J.:
This case is a sequel to the case of Pirovano vs. De la Rama Steamship Co., 96 Phil. 335.
Briefly, the facts of the aforestated case may be stated as follows:
Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the early part of 1941, De la
Rama Steamship Co. insured the life of said Enrico Pirovano, who was then its President and General
Manager until the time of his death, with various Philippine and American insurance companies for a total sum
of one million pesos, designating itself as the beneficiary of the policies, obtained by it. Due to the Japanese
occupation of the Philippines during the second World War, the Company was unable to pay the premiums on
the policies issued by its Philippine insurers and these policies lapsed, while the policies issued by its American
insurers were kept effective and subsisting, the New York office of the Company having continued paying its
premiums from year to year.

During the Japanese occupation , or more particularly in the latter part of 1944, said Enrico Pirovano died.
After the liberation of the Philippines from the Japanese forces, the Board of Directors of De la Rama
Steamship Co. adopted a resolution dated July 10, 1946 granting and setting aside, out of the proceeds
expected to be collected on the insurance policies taken on the life of said Enrico Pirovano, the sum of
P400,000.00 for equal division among the four (4) minor children of the deceased, said sum of money to be
convertible into 4,000 shares of stock of the Company, at par, or 1,000 shares for each child. Shortly thereafter,
the Company received the total sum of P643,000.00 as proceeds of the said life insurance policies obtained
from American insurers.
Upon receipt of the last stated sum of money, the Board of Directors of the Company modified, on January 6,
1947, the above-mentioned resolution by renouncing all its rights title, and interest to the said amount of
P643,000.00 in favor of the minor children of the deceased, subject to the express condition that said amount
should be retained by the Company in the nature of a loan to it, drawing interest at the rate of five per centum
(5%) per annum, and payable to the Pirovano children after the Company shall have first settled in full the
balance of its present remaining bonded indebtedness in the sum of approximately P5,000,000.00. This latter
resolution was carried out in a Memorandum Agreement on January 10, 1947 and June 17, 1947., respectively,
executed by the Company and Mrs. Estefania R. Pirovano, the latter acting in her capacity as guardian of her
children (petitioners-appellants herein) find pursuant to an express authority granted her by the court.
On June 24, 1947, the Board of Directors of the Company further modified the last mentioned resolution
providing therein that the Company shall pay the proceeds of said life insurance policies to the heirs of the said
Enrico Pirovano after the Company shall have settled in full the balance of its present remaining bonded
indebtedness, but the annual interests accruing on the principal shall be paid to the heirs of the said Enrico
Pirovano, or their duly appointed representative, whenever the Company is in a position to meet said
obligation.
On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her children, executed a public document
formally accepting the donation; and, on the same date, the Company through its Board of Directors, took
official notice of this formal acceptance.
On September 13, 1949, the stockholders of the Company formally ratified the various resolutions hereinabove
mentioned with certain clarifying modifications that the payment of the donation shall not be effected until such
time as the Company shall have first duly liquidated its present bonded indebtedness in the amount of
P3,260,855.77 with the National Development Company, or fully redeemed the preferred shares of stock in the
amount which shall be issued to the National Development Company in lieu thereof; and that any and all taxes,
legal fees, and expenses in any way connected with the above transaction shall be chargeable and deducted
from the proceeds of the life insurance policies mentioned in the resolutions of the Board of Directors.
On March 8, 1951, however, the majority stockholders of the Company voted to revoke the resolution
approving the donation in favor of the Pirovano children.
As a consequence of this revocation and refusal of the Company to pay the balance of the donation amounting
to P564,980.90 despite demands therefor, the herein petitioners-appellants represented by their natural
guardian, Mrs. Estefania R. Pirovano, brought an action for the recovery of said amount, plus interest and
damages against De la Rama Steamship Co., in the Court of First Instance of Rizal, which case ultimately
culminated to an appeal to this Court. On December 29, 1954, this court rendered its decision in the appealed
case (96 Phil. 335) holding that the donation was valid and remunerative in nature, the dispositive part of which
reads:
Wherefore, the decision appealed from should be modified as follows: (a) that the donation in favor of
the children of the late Enrico Pirovano of the proceeds of the insurance policies taken on his life is
valid and binding on the defendant corporation; (b) that said donation, which amounts to a total of
P583,813.59, including interest, as it appears in the books of the corporation as of August 31, 1951,
plus interest thereon at the rate of 5 per cent per annum from the filing of the complaint, should be paid
to the plaintiffs after the defendant corporation shall have fully redeemed the preferred shares issued

to the National Development Company under the terms and conditions stared in the resolutions of the
Board of Directors of January 6, 1947 and June 24, 1947, as amended by the resolution of the
stockholders adopted on September 13, 1949; and (c) defendant shall pay to plaintiffs an additional
amount equivalent to 10 per cent of said amount of P583,813.59 as damages by way of attorney's
fees, and to pay the costs of action. (Pirovano et al. vs. De la Rama Steamship Co., 96 Phil. 367-368)
The above decision became final and executory. In compliance therewith, De la Rama Steamship Co. made,
on April 6, 1955, a partial payment on the amount of the judgment and paid the balance thereof on May 12,
1955.
On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of P60,869.67 as
donees' gift tax, inclusive of surcharges, interests and other penalties, against each of the petitionersappellants, or for the total sum of P243,478.68; and, on April 23, 1955, a donor's gift tax in the total amount of
P34,371.76 was also assessed against De la Rama Steamship Co., which the latter paid.
Petitioners-appellants herein contested respondent Commissioner's assessment and imposition of the donees'
gift taxes and donor's gift tax and also made a claim for refund of the donor's gift tax so collected. Respondent
Commissioner overruled petitioners' claims; hence, the latter presented two (2) petitions for review against
respondent's rulings before the Court of Tax Appeals, said petitions having been docketed as CTA Cases Nos.
347 and 375. CTA Case No. 347 relates to the petition disputing the legality of the assessment of donees' gift
taxes and donor's gift tax while CTA Case No. 375 refers to the claim for refund of the donor's gift tax already
paid.
After the filing of respondent's usual answers to the petitions, the two cases, being interrelated to each other,
were tried jointly and terminated.
On January 31, 1962, the Court of Tax Appeals rendered its decision in the two cases, the dispositive part of
which reads:
In resume, we are of the opinion, that (1) the donor's gift tax in the sum of P34,371.76 was erroneously
assessed and collected, hence, petitioners are entitled to the refund thereof; (2) the donees' gift taxes
were correctly assessed; (3) the imposition of the surcharge of 25% is not proper; (4) the surcharge of
5% is legally due; and (5) the interest of 1% per month on the deficiency donees' gift taxes is due from
petitioners from March 8, 1955 until the taxes are paid.
IN LINE WITH THE FOREGOING OPINION, petitioners are hereby ordered to pay the donees' gift
taxes as assessed by respondent, plus 5% surcharge and interest at the rate of 1% per month from
March 8, 1955 to the date of payment of said donees' gift taxes. Respondent is ordered to apply the
sum of P34,371.76 which is refundable to petitioners, against the amount due from petitioners. With
costs against petitioners in Case No. 347.
Petitioners-appellants herein filed a motion to reconsider the above decision, which the lower court denied.
Hence, this appeal before us.
In the instant appeal, petitioners-appellants herein question only that portion of the decision of the lower court
ordering the payment of donees' gift taxes as assessed by respondent as well as the imposition of surcharge
and interest on the amount of donees' gift taxes.
In their brief and memorandum, they dispute the factual finding of the lower court that De la Rama Steamship
Company's renunciation of its rights, title, and interest over the proceeds of said life insurance policies in favor
of the Pirovano children "was motivated solely and exclusively by its sense of gratitude, an act of pure liberality,
and not to pay additional compensation for services inadequately paid for." Petitioners now contend that the
lower court's finding was erroneous in seemingly considering the disputed grant as a simple donation, since our
previous decision (96 Phil. 335) had already declared that the transfer to the Pirovano children was a
remuneratory donation. Petitioners further contend that the same was made not for an insufficient or
inadequate consideration but rather it a was made for a full and adequate compensation for the valuable

services rendered by the late Enrico Pirovano to the De la Rama Steamship Co.; hence, the donation does not
constitute a taxable gift under the provisions of Section 108 of the National Internal Revenue Code.
The argument for petitioners-appellants fails to take into account the fact that neither in Spanish nor in AngloAmerican law was it considered that past services, rendered without relying on a coetaneous promise, express
or implied, that such services would be paid for in the future, constituted cause or consideration that would
make a conveyance of property anything else but a gift or donation. This conclusion flows from the text of
Article 619 of the Code of 1889 (identical with Article 726 of the present Civil Code of the Philippines):
When a person gives to another a thing ... on account of the latter's merits or of the services rendered
by him to the donor, provided they do not constitute a demandable debt, ..., there is also a donation. ...
.
There is nothing on record to show that when the late Enrico Pirovano rendered services as President and
General Manager of the De la Rama Steamship Co. he was not fully compensated for such services, or that,
because they were "largely responsible for the rapid and very successful development of the activities of the
company" (Res. of July 10, 1946). Pirovano expected or was promised further compensation over and in
addition to his regular emoluments as President and General Manager. The fact that his services contributed in
a large measure to the success of the company did not give rise to a recoverable debt, and the conveyances
made by the company to his heirs remain a gift or donation. This is emphasized by the directors' Resolution of
January 6, 1947, that "out of gratitude" the company decided to renounce in favor of Pirovano's heirs the
proceeds of the life insurance policies in question. The true consideration for the donation was, therefore, the
company's gratitude for his services, and not the services themselves.
That the tax court regarded the conveyance as a simple donation, instead of a remuneratory one as it was
declared to be in our previous decision, is but an innocuous error; whether remuneratory or simple, the
conveyance remained a gift, taxable under Chapter 2, Title III of the Internal Revenue Code.
But then appellants contend, the entire property or right donated should not be considered as a gift for taxation
purposes; only that portion of the value of the property or right transferred, if any, which is in excess of the
value of the services rendered should be considered as a taxable gift. They cite in support Section 111 of the
Tax Code which provides that
Where property is transferred for less, than an adequate and full consideration in money or money's
worth, then the amount by which the value of the property exceeded the value of the consideration
shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, ... .
The flaw in this argument lies in the fact that, as copied from American law, the term consideration used in this
section refers to the technical "consideration" defined by the American Law Institute (Restatement of Contracts)
as "anything that is bargained for by the promisor and given by the promisee in exchange for the promise"
(Also, Corbin on Contracts, Vol. I, p. 359). But, as we have seen, Pirovano's successful activities as officer of
the De la Rama Steamship Co. cannot be deemed such consideration for the gift to his heirs, since the
services were rendered long before the Company ceded the value of the life policies to said heirs; cession and
services were not the result of one bargain or of a mutual exchange of promises.
And the Anglo-American law treats a subsequent promise to pay for past services (like one to pay for
improvements already made without prior request from the promisor) to be a nudum pactum (Roscorla vs.
Thomas, 3 Q.B. 234; Peters vs. Poro, 25 ALR 615; Carson vs. Clark, 25 Am. Dec. 79; Boston vs. Dodge, 12
Am. Dec. 206), i.e., one that is unenforceable in view of the common law rule that consideration must consist in
a legal benefit to the promisee or some legal detriment to the promisor.
What is more, the actual consideration for the cession of the policies, as previously shown, was the Company's
gratitude to Pirovano; so that under section 111 of the Code there is no consideration the value of which can be
deducted from that of the property transferred as a gift. Like "love and affection," gratitude has no economic
value and is not "consideration" in the sense that the word is used in this section of the Tax Code.

As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his well-known book, "Outlines of the
Law" (p. 204)
Love and affection are not considerations of value they are not estimable in terms of value. Nor are
sentiments of gratitude for gratuitous part favors or kindnesses; nor are obligations which are merely moral. It
has been well said that if a moral obligation were alone sufficient it would remove the necessity for any
consideration at all, since the fact of making a promise impose, the moral obligation to perform it."
It is of course perfectly possible that a donation or gift should at the same time impose a burden or condition on
the donee involving some economic liability for him. A, for example, may donate a parcel of land to B on
condition that the latter assume a mortgage existing on the donated land. In this case the donee may rightfully
insist that the gift tax be computed only on the value of the land less the value of the mortgage. This, in fact, is
contemplated by Article 619 of the Civil Code of 1889 (Art. 726 of the Tax Code) when it provides that there is
also a donation "when the gift imposes upon the donee a burden which is less than the value of the thing
given." Section 111 of the Tax Code has in view situations of this kind, since it also prescribes that "the amount
by which the value of the property exceeded the value of the consideration" shall be deemed a gift for the
purpose of the tax. .
Petitioners finally contend that, even assuming that the donation in question is subject to donees' gift taxes, the
imposition of the surcharge of 5% and interest of 1% per month from March 8, 1955 was not justified because
the proceeds of the life insurance policies were actually received on April 6, 1955 and May 12, 1955 only and in
accordance with Section 115(c) of the Tax Code; the filing of the returns of such tax became due on March 1,
1956 and the tax became payable on May 15, 1956, as provided for in Section 116(a) of the same Code. In
other words, petitioners maintain that the assessment and demand for donees' gift taxes was prematurely
made and of no legal effect; hence, they should not be held liable for such surcharge and interest.
It is well to note, and it is not disputed, that petitioners-donees have failed to file any gift tax return and that they
also failed to pay the amount of the assessment made against them by respondent in 1955. This situation is
covered by Section 119(b) (1) and (c) and Section 120 of the Tax Code:
(b) Deficiency.
(1) Payment not extended. Where a deficiency, or any interest assessed in connection therewith, or
any addition to the taxes provided for in section one hundred twenty is not paid in full within thirty days
from the date of the notice and demand from the Commissioner, there shall be collected as a part of
the taxes, interest upon the unpaid amount at the rate of one per centum a month from the date of
such notice and demand until it is paid. (section 119)
(c) Surcharge. If any amount of the taxes included in the notice and demand from the
Commissioner of Internal Revenue is not paid in full within thirty days after such notice and demand,
there shall be collected in addition to the interest prescribed above as a part of the taxes a surcharge
of five per centum of the unpaid amount. (sec. 119)
The failure to file a return was found by the lower court to be due to reasonable cause and not to willful neglect.
On this score, the elimination by the lower court of the 25% surcharge is ad valorem penalty which respondent
Commissioner had imposed pursuant to Section 120 of the Tax Code was proper, since said Section 120 vests
in the Commissioner of Internal Revenue or in the tax court power and authority to impose or not to impose
such penalty depending upon whether or not reasonable cause has been shown in the non-filing of such return.
On the other hand, unlike said Section 120, Section 119, paragraphs (b) (1) and (c) of the Tax Code, does not
confer on the Commissioner of Internal Revenue or on the courts any power and discretion not to impose such
interest and surcharge. It is likewise provided for by law that an appeal to the Court of Tax Appeals from a
decision of the Commissioner of Internal Revenue shall not suspend the payment or collection of the tax liability
of the taxpayer unless a motion to that effect shall have been presented to the court and granted by it on the
ground that such collection will jeopardize the interest of the taxpayer (Sec. 11, Republic Act No. 1125; Rule 12,
Rules of the Court of Tax Appeals). It should further be noted that

It has been the uniform holding of this Court that no suit for enjoining the collection of a tax, disputed
or undisputed, can be brought, the remedy being to pay the tax first, formerly under protest and now
without need of protect, file the claim with the Collector, and if he denies it, bring an action for recovery
against him. (David v. Ramos, et al., 90 Phil. 351)
Section 306 of the National Internal Revenue Code ... lays down the procedure to be followed in those
cases wherein a taxpayer entertains some doubt about the correctness of a tax sought to be collected.
Said section provides that the tax, should first be paid and the taxpayer should sue for its recovery
afterwards. The purpose of the law obviously is to prevent delay in the collection of taxes, upon which
the Government depends for its existence. To allow a taxpayer to first secure a ruling as regards the
validity of the tax before paying it would be to defeat this purpose. (National Dental Supply Co. vs.
Meer, 90 Phil. 265)
Petitioners did not file in the lower court any motion for the suspension of payment or collection of the amount
of assessment made against them.
On the basis of the above-stated provisions of law and applicable authorities, it is evident that the imposition of
1% interest monthly and 5% surcharge is justified and legal. As succinctly stated by the court below, said
imposition is "mandatory and may not be waived by the Commissioner of Internal Revenue or by the courts"
(Resolution on petitioners' motion for reconsideration, Annex XIV, petition). Hence, said imposition of interest
and surcharge by the lower court should be upheld.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. Costs against petitioners Pirovano.
Bengzon, C.J., Bautista Angelo, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.
Concepcion, J., took no part.
Barrera, J., is on leave.

FIRST DIVISION
[G.R. No. 125355. March 30, 2000]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF


APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION,respondents. Court
DECISION
PARDO, J.:
What is before the Court is a petition for review on certiorari of the decision of the Court
of Appeals, reversing that of the Court of Tax Appeals, which affirmed with
modification the decision of the Commissioner of Internal Revenue ruling that
Commonwealth Management and Services Corporation, is liable for value added tax for
services to clients during taxable year 1988.
[1]

[2]

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is


a corporation duly organized and existing under the laws of the Philippines. It is an
affiliate of Philippine American Life Insurance Co. (Philamlife), organized by the letter to
perform collection, consultative and other technical services, including functioning as an
internal auditor, of Philamlife and its other affiliates.
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to
private respondent COMASERCO for deficiency value-added tax (VAT) amounting to
P351,851.01, for taxable year 1988, computed as follows:
"Taxable sale/receipt P1,679,155.00
10% tax due thereon 167,915.50
25% surcharge 41,978.88
20% interest per annum 125,936.63
Compromise penalty for late payment 16,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P 351,831.01"

[3]

COMASERCO's annual corporate income tax return ending December 31, 1988
indicated a net loss in its operations in the amount of P6,077.00. J lexj
On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the
latter's finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal
Revenue sent a collection letter to COMASERCO demanding payment of the deficiency
VAT.
On September 29,1992, COMASERCO filed with the Court of Tax Appeals a petition
for review contesting the Commissioner's assessment. COMASERCO asserted that the
services it rendered to Philamlife and its affiliates, relating to collections, consultative
and other technical assistance, including functioning as an internal auditor, were on a
"no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged id the
business of providing services to Philamlife and its affiliates. COMASERCO was
established to ensure operational orderliness and administrative efficiency of Philamlife
and its affiliates, and not in the sale of services. COMASERCO stressed that it was not
profit-motivated, thus not engaged in business. In fact, it did not generate profit but
suffered a net loss in taxable year 1988. COMASERCO averred that since it was not
engaged in business, it was not liable to pay VAT.
[4]

On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the
Commissioner of Internal Revenue, the dispositive portion of which reads:

"WHEREFORE, the decision of the Commissioner of Internal Revenue


assessing petitioner deficiency value-added tax for the taxable year 1988
is AFFIRMED with slight modifications. Accordingly, petitioner is ordered to
pay respondent Commissioner of Internal Revenue the amount of
P335,831.01 inclusive of the 25% surcharge and interest plus 20%
interest from January 24, 1992 until fully paid pursuant to Section 248 and
249 of the Tax Code.
"The compromise penalty of P16,000.00 imposed by the respondent in her
assessment letter shall not be included in the payment as there was no
compromise agreement entered into between petitioner and respondent
with respect to the value-added tax deficiency."
[5]

On July 26, 1995, respondent filed with the Court of Appeals, petition for review of the
decision of the Court of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered decision
reversing that of the Court of Tax Appeals, the dispositive portion of which reads: Lexj uris
"WHEREFORE, in view of the foregoing, judgment is hereby rendered
REVERSING and SETTING ASIDE the questioned Decision promulgated
on 22 June 1995. The assessment for deficiency value-added tax for the
taxable year 1988 inclusive of surcharge, interest and penalty charges are
ordered CANCELLED for lack of legal and factual basis."
[6]

The Court of Appeals 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.
[7]

On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition
for review on certiorari assailing the decision of the Court of Appeals.
On August 7, 1996, we required respondent COMASERCO to file comment on the
petition, and on September 26, 1996, COMASERCO complied with the resolution.

[8]

We give due course to the petition.


At issue in this case is whether COMASERCO was engaged in the sale of services, and
thus liable to pay VAT thereon.
Petitioner avers that to "engage in business" and to "engage in the sale of services" are
two different things. Petitioner maintains that the services rendered by COMASERCO to

Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on
the value added by the performance of the service. It is immaterial whether profit is
derived from rendering the service. Juri smis
We agree with the Commissioner.
Section 99 of the National Internal Revenue Code of 1986, as amended by Executive
Order (E.O.) No. 273 in 1988, provides that:
"Section 99. Persons liable. - Any person who, in the course of trade or
business, sells, barters or exchanges goods, renders services, or engages
in similar transactions and any person who imports goods shall be subject
to the value-added tax (VAT) imposed in Sections 100 to 102 of this
Code."
[9]

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. It avers that the activities
of the entity must be profit- oriented. COMASERCO submits that it is not motivated by
profit, as defined by its primary purpose in the articles of incorporation, stating that it is
operating "only on reimbursement-of-cost basis, without any profit." Private respondent
argues that profit motive is material in ascertaining who to tax for purposes of
determining liability for VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law
(EVAT), amending among other sections, Section 99 of the Tax Code. On January 1,
1998, Republic Act 8424, the National Internal Revenue Code of 1997, took effect. The
amended law provides that:
"SEC. 105. Persons Liable. - Any person who, in the course of trade or
business, sells, barters, exchanges, leases goods or properties, renders
services, and any person who imports goods shall be subject to the valueadded tax (VAT) imposed in Sections 106 and 108 of this Code.
"The value-added tax is an indirect tax and the amount of tax may be
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services. This rule shall likewise apply to existing sale or
lease of goods, properties or services at the time of the effectivity of
Republic Act No.7716.
"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. Jjj uris
"The rule of regularity, to the contrary notwithstanding, services as defined
in this Code rendered in the Philippines by nonresident foreign persons
shall be considered as being rendered in the course of trade or business."
Contrary to COMASERCO's contention the above provision clarifies that even a nonstock, non-profit, organization or government entity, is liable to pay VAT on the sale of
goods or services. VAT is a tax on transactions, imposed at every stage of the
distribution process on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable thereto. The term "in
the course of trade or business" requires the regular conduct or pursuit of a commercial
or an economic activity, regardless of whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or business" incorporated in the
present law applies to all transactions even to those made prior to its enactment.
Executive Order No. 273 stated that any person who, in the course of trade or business,
sells, barters or exchanges goods and services, was already liable to pay VAT. The
present law merely stresses that even a nonstock, nonprofit organization or government
entity is liable to pay VAT for the sale of goods and services.
Section 108 of the National Internal Revenue Code of 1997 defines the phrase "sale of
services" as the "performance of all kinds of services for others for a fee, remuneration
or consideration." It includes "the supply of technical advice, assistance or services
rendered in connection with technical management or administration of any scientific,
industrial or commercial undertaking or project."
[10]

[11]

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No.
010-98 emphasizing that a domestic corporation that provided technical, research,
management and technical assistance to its affiliated companies and received
payments on a reimbursement-of-cost basis, without any intention of realizing profit,
was subject to VAT on services rendered. In fact, even if such corporation was
organized without any intention of realizing profit, any income or profit generated by the
entity in the conduct of its activities was subject to income tax. lex
[12]

Hence, it is immaterial whether the primary purpose of a corporation indicates that it


receives payments for services rendered to its affiliates on a reimbursement-on-cost
basis only, without realizing profit, for purposes of determining liability for VAT on
services rendered. As long as the entity provides service for a fee, remuneration or
consideration, then the service rendered is subject to VAT.
At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that
allow exemptions are construed strictly against the grantee and liberally in favor of the
government. Otherwise stated, any exemption from the payment of a tax must be
clearly stated in the language of the law; it cannot be merely implied therefrom. In the
[13]

case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions
exempted from VAT. The services rendered by COMASERCO do not fall within the
exemptions.
Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly
ruled that the services rendered by COMASERCO to Philamlife and its affiliates are
subject to VAT. As pointed out by the Commissioner, the performance of all kinds of
services for others for a fee, remuneration or consideration is considered as sale of
services subject to VAT. As the government agency charged with the enforcement of the
law, the opinion of the Commissioner of Internal Revenue, in the absence of any
showing that it is plainly wrong, is entitled to great weight. Also, it has been the long
standing policy and practice of this Court to respect the conclusions of quasi-judicial
agencies, such as the Court of Tax Appeals which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax cases and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident
exercise of its authority.
[14]

[15]

There is no merit to respondent's contention that the Court of Appeals' decision in CAG. R. No. 34042, declaring the COMASERCO as not engaged in business and not
liable for the payment of fixed and percentage taxes, binds petitioner. The issue in CAG. R. No. 34042 is different from the present case, which involves COMASERCO's
liability for VAT. As heretofore stated, every person who sells, barters, or exchanges
goods and services, in the course of trade or business, as defined by law, is subject to
VAT. Jksm
WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the
Court of Appeals in CA-G. R. SP No. 37930. The Court hereby REINSTATES the
decision of the Court of Tax Appeals in C. T. A. Case No. 4853.
No costs.
SO ORDERED.
Davide, Jr., C.J.,(Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.

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.
DECISION

TINGA, J.:
The issue in this present petition is whether the sale by the National Development Company (NDC) of five (5)
of its vessels to the private respondents is subject to value-added tax (VAT) under the National Internal
Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. The Court of Tax Appeals (CTA) and
the Court of Appeals commonly ruled that the sale is not subject to VAT. We affirm, though on a more
unequivocal rationale than that utilized by the rulings under review. The fact that the sale was not in the course
of the trade or business of NDC is sufficient in itself to declare the sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
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 (NMC). The NDC decided to sell in one lot its
NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels. 1 The
vessels were constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring
Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a
bareboat basis, to the NMC.2
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."3 On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the
shares and the vessels for P168,000,000.00. 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).4 The bid was approved by the Committee on
Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, and
Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract
stipulated that "[v]alue-added tax, if any, shall be for the account of the PURCHASER." 5 Per arrangement, an
irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as security for the
payment of VAT, if any. By this time, 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) by the law firm of Sycip
Salazar Hernandez & Gatmaitan, presumably in behalf of private respondents. Thus, the parties agreed that
should no favorable ruling be received from the BIR, NDC was authorized to draw on the Letter of Credit upon
written demand the amount needed for the payment of the VAT on the stipulated due date, 20 December 1988. 6
In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14 December
1988 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]." 7
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No. 395-88
(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. 007-89 dated 24 February 1989, reiterating the earlier VAT rulings. At this point, NDC drew on the
Letter of Credit to pay for the VAT, and the amount of P15,120,000.00 in taxes was paid on 16 March 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by a
Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings No. 395-88,
568-88 and 007-89, as well as the refund of the VAT payment made amounting to P15,120,000.00.8 The
Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that private respondents were not
the real parties in interest as they were not the transferors or sellers as contemplated in Sections 99 and 100 of
the then Tax Code. The CIR also squarely defended the VAT rulings holding the sale of the vessels liable for
VAT, especially citing Section 3 of Revenue Regulation No. 5-87 (R.R. 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."
In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted the petition. 9 The CTA
ruled that the sale of a vessel was an "isolated transaction," not done in the ordinary course of NDCs business,
and was thus not subject to VAT, which under Section 99 of the Tax Code, was applied only to sales in the
course of trade or business. The CTA further held that the sale of the vessels could not be "deemed sale,"
and thus subject to VAT, as the transaction did not fall under the enumeration of transactions deemed sale as
listed either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any
case of doubt should be resolved in favor of private respondents since Section 99 of the Tax Code which
implemented VAT is not an exemption provision, but a classification provision which warranted the resolution of
doubts in favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals, 10 which on 11 March 1997, rendered a Decision
reversing the CTA.11 While the appellate court agreed that the sale was an isolated transaction, not made in the
course of NDCs regular trade or business, it nonetheless found that the transaction fell within the classification
of those "deemed sale" under R.R. No. 5-87, since the sale of the vessels together with the NMC shares
brought about a change of ownership in NMC. The Court of Appeals also applied the principle governing tax
exemptions that such should be strictly construed against the taxpayer, and liberally in favor of the
government.12
However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5
February 2001.13 This time, the appellate court ruled that the "change of ownership of business" as
contemplated in R.R. No. 5-87 must be a consequence of the "retirement from or cessation of business" by the
owner of the goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also agreed with the
CTA that the classification of transactions "deemed sale" was a classification statute, and not an exemption
statute, thus warranting the resolution of any doubt in favor of the taxpayer.14
To the mind of the Court, the arguments raised in the present petition have already been adequately discussed
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
disquisitions by the lower courts on the applicability of Section 100 of the Tax Code and Section 4 of R.R. No.
5-87 are ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even
though it is assessed on many levels of transactions on the basis of a fixed percentage. 15 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 16 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). 17 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,18 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.
Yet VAT is not a singular-minded 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
subsequent incarnations,19 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.

That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by
both the CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually
reconsidered.20 We cite with approval the CTAs explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, 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. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH
ANNOTATIONS), p. 608-9 (1988)]. "Course of business" is what is usually done in the management
of trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words &
Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is that "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 VATregistered activity of NDC is leasing personal property.21
This finding is confirmed by the Revised Charter 22 of the NDC which bears no indication that the NDC was
created for the primary purpose of selling real property.23
The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before
this Court,24 should have definitively settled the matter. Any sale, barter or exchange of goods or services not in
the course of trade or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon by the
CIR, is captioned "Value-added tax on sale of goods," and it expressly states that "[t]here shall be levied,
assessed and collected on every sale, barter or exchange of goods, a value added tax x x x." Section 100
should be read in light of Section 99, which lays down the general rule on which persons are liable for VAT in
the first place and on what transaction if at all. It may even be noted that Section 99 is the very first provision in
Title IV of the Tax Code, the Title that covers VAT in the law. Before any portion of Section 100, or the rest of
the law for that matter, may be applied in order to subject a transaction to VAT, it must first be satisfied that the
taxpayer and transaction involved is liable for VAT in the first place under Section 99.
It would have been a different matter if Section 100 purported to define the phrase "in the course of trade or
business" as expressed in Section 99. If that were so, reference to Section 100 would have been necessary as
a means of ascertaining whether the sale of the vessels was "in the course of trade or business," and thus
subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the
meaning of "in the course of trade or business," but instead the identification of the transactions which may be
deemed as sale. It would become necessary to ascertain whether under those two provisions the transaction
may be deemed a sale, only if it is settled that the transaction occurred in the course of trade or business in the
first place. If the transaction transpired outside the course of trade or business, it would be irrelevant for the
purpose of determining VAT liability whether the transaction may be deemed sale, since it anyway is not subject
to VAT.
Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in
the course of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99
of the Tax Code, no matter how the said sale may hew to those transactions deemed sale as defined under
Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the Court
finds the discussions offered on this point by the CTA and the Court of Appeals (in its subsequent Resolution)
essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions deemed sale

those involving "change of ownership of business." However, Section 4(E) of R.R. No. 5-87, reflecting Section
100 of the 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. 5-87 expressly characterizes the "change of ownership of
business" as only a "circumstance" that attends those transactions "deemed sale," which are otherwise stated
in the same section.26
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.
Quisumbing, Chairman, Carpio, Carpio-Morales, Velasco, Jr., J.J., concur.