[CASE DIGEST] CIR v. CA and COMASERCO (G.R. No.

125355)
March 30, 2000

Commissioner of Internal Revenue, petitioner

CA and Commonwealth Management and Services Corporation, respondents

FACTS:

1. Commonwealth Management and Services Corp. (COMASERCO) 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 latter to perform collection, consultative and other technical services,
including functioning as an internal auditor, of Philamlife and its other affiliates.

2. On January 24, 1992, the BIR issued an assessment to Commonwealth Management and Services
Corp. (COMASERCO) for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year
1988

3. 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.

4. On September 29,1992, COMASERCO filed with the CTA a petition for review contesting the
Commissioner's assessment. Its arguments are as follows:

 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;
 That it was not engaged in the business of providing services to Philamlife and its affiliates and
that it was established to ensure operational orderliness and administrative efficiency of Philamlife
and its affiliates, and not in the sale of services; and
 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. Since it was not engaged in business, it was not
liable to pay VAT.

CTA: Denied COMASERCO's petition. Affirmed the Commissioner's deficiency VAT assessment for the
year 1988.

CA: Reversed CTA ruling. Cancelled the assessment for deficiency VAT for the year 1988. The basis for
the CA's ruling was a prior ruling it made in another case involving COMASERCO, where it was held that
COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its
affiliates and as such was not engaged in business of providing services to Philamlife and its affiliates.

Hence, the instant petition for review on certiorari by the Commissioner.

ISSUE:

Whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.

HELD:

Petition granted. Reversed CA ruling. Reinstated CTA ruling. COMASERCO ordered to pay deficiency
VAT as per the assessment issued by the Commissioner for the taxable year 1988.

1. Who are the persons liable for VAT?

"Section 99, NIRC. 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.""

2. What does "in the course of trade or business" mean?

COMASERCO: The term "in the course of trade or business" requires that the "business" is carried on
with a view to profit or livelihood. In other words, the activities of the entity must be profit-oriented.

SC: Under Sec. 105 (Persons Liable) of R.A. No. 7716, or the Expanded VAT Law (EVAT), 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.

This definition applies to all transactions even to those made prior to the enactment of the EVAT Law,
which merely stresses that even a nonstock, nonprofit organization or government entity is liable to
pay VAT for the sale of goods and services.

3. Are non-stock, nonprofit organizations or government entities (such as COMASERCO) liable to pay
VAT for the sale of goods and services?

COMASERCO: No, profit motive is material in ascertaining who to tax for purposes of determining
liability for VAT.

SC: Yes, even a non-stock, non-profit, organization or government entity, is liable to pay VAT on the
sale of goods or services.

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.

This contention finds support in BIR Ruling No. 010-98 issued by the Commissioner on February 5, 1998,
which provides 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.

4. Is COMASERCO liable to pay VAT?

COMASERCO: Because COMASERCO 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," it couldn't be said that it is performing acts in the course of trade or business. Hence, it is not
liable for the payment of VAT.

SC: The services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. The
performance of all kinds of services for others for a fee, remuneration or consideration is considered as
sale of services subject to VAT. (See items 1-3 in ratio.)
5. Can the CA's ruling in a prior case involving COMASERCO be made applicable in the instant case?

SC: No. The issue in the first case (i.e., whether COMASERCO is engaged in business to determine
liability for the payment of fixed and percentage taxes), is different from the present case, which
involves COMASERCO's liability for VAT.

Sec. 236 (G) Persons Required to Register for Value Added Tax. –
(1) Any person who, in the course of trade or business, sells, barters or exchanges goods or
properties, or engages in the sale or exchange of services, shall be liable to register for value-
added tax if:
(a) His gross sales or receipts for the past twelve (12) months, other than those that are
exempt under Section 109 (A) to (BB), have exceeded Three million pesos
(Php3,000,000.00);
(b) There are reasonable grounds to believe that his gross sales or receipts for the next twelve
(12) months, other than those that are exempt under Section 109 (A) to (BB), will exceed
Three million pesos (Php3,000,000.00);
(2) Every person who becomes liable to be registered under paragraph (1) of this Subsection shall
register with the Revenue District Office which has jurisdiction over the head office or branch
of that person, and shall pay the annual registration fee prescribed in Subsection (B) hereof. If
he fails to register, he shall be liable to pay the tax under Title IV as if he were a VAT-
registered person, but without the benefit of input tax credits for the period in which he was
not properly registered.
(H) Optional Registration for Value-added Tax of Exempt Peron. –
(1) Any person who is not required to register for value-added tax under Subsection (G) hereof
may elect to register for value-added tax by registering with the Revenue District Office that has
jurisdiction over the head office of that person, and paying the annual registration fee in
Subsection (B) hereof;
(2) Any person who elects to register under this Subsection shall not be entitled to cancel his
registration under Subsection (F) (2) for the next three (3) years.
Provided, that any person taxed under Section 24(A) (2) (b) and 24(A)(2)(c)(2)(a) of the NIRC who
elected to pay the eight percent (8%) tax on gross sales or receipts shall not be allowed to avail of
this option.
For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type
in accordance with the provisions of Subsection (C) hereof shall be referred to as a ‘VAT-registered
persons’ who shall be assigned only one Taxpayer Identification Number (TIN).

"Sec. 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the
following transactions shall be exempt from the value-added tax:

"(A) Sale of nonfood agricultural products; marine and forest products in their original state
by the primary producer or the owner of the land where the same are produced;

"(B) Sale of cotton seeds in their original state; and copra;

"(C) Sale or importation of agricultural and marine food products in their original state,
livestock and poultry of or king generally used as, or yielding or producing foods for human
consumption; and breeding stock and genetic materials therefor.
Products classified under this paragraph and paragraph (a) shall be considered in their
original state even if they have undergone the simple processes of preparation or
preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or
stripping.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, and ordinary salt shall
be considered in their original state;

"(D) Importation of professional instruments and implements, tools of trade, occupation or

employment, wearing apparel, domestic animals, and personal and household effects
belonging to persons coming to settle in the Philippines or Filipinos or their families and
descendants who are now residents or citizens of other countries, such parties hereinafter
referred to as overseas Filipinos, in quantities and of the class suitable to the profession,
rank or position of the persons importing said items, for their own use and not for barter or
sale, accompanying such persons, or arriving within a reasonable time: Provided, That the
Bureau of Customs may, upon the production of satisfactory evidence that such persons are
actually coming to settle in the Philippines and that the goods are brought from their former
place of abode, exempt such goods from payment of duties and taxes: Provided,
further, That vehicles, vessels, aircrafts, machineries and other similar goods for use in
manufacture, shall not fall within this classification and shall therefore be subject to duties,
taxes and other charges;

"(E) Services subject to percentage tax under Title V;

"(F) Services by agricultural contract growers and milling for others of palay into rice, corn
into grits and sugar cane into raw sugar;

"(G) Medical, dental, hospital and veterinary services except those rendered by
professionals;

"(H) Educational services rendered by private educational institutions, duly accredited by the
Department of Education (DepEd), the Commission on Higher Education (CHED), the
Technical Education and Skills Development Authority (TESDA) and those rendered by
government educational institutions;

"(I) Services rendered by individuals pursuant to an employer-employee relationship;

"(J) Services rendered by regional or area headquarters established in the Philippines by

multinational corporations which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines;

"(K) Transactions which are exempt under international agreements to which the Philippines
is a signatory or under special laws, except those under Presidential Decree No. 529;

"(L) Sales by agricultural cooperatives duly registered with the Cooperative Development
Authority to their members as well as sale of their produce, whether in its original state or
processed form, to non-members; their importation of direct farm inputs, machineries and
equipment, including spare parts thereof, to be used directly and exclusively in the
production and/or processing of their produce;
"(M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly
registered with the Cooperative Development Authority;

"(N) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with
the Cooperative Development Authority: Provided, That the share capital contribution of each
member does not exceed Fifteen thousand pesos (₱15,000) and regardless of the aggregate
capital and net surplus ratably distributed among the members;

"(O) Export sales by persons who are not VAT-registered;

"(P) Sale of real properties not primarily held for sale to customers or held for lease in the
ordinary course of trade or business or real property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279, otherwise known as the Urban Development
and Housing Act of 1992, and other related laws, residential lot valued at One million five
hundred thousand pesos (₱1,500,000) and below, house and lot, and other residential
dwellings valued at Two million five hundred thousand pesos (₱2,500,000) and
below: Provided, That beginning January 1, 2021, the VAT exemption shall only apply to sale
of real properties not primarily held for sale to customers or held for lease in the ordinary
course of trade or business, sale of real property utilized for socialized housing as defined by
Republic Act No. 7279, sale of house and lot, and other residential dwellings with selling
price of not more than Two million pesos (₱2,000,000): Provided, further, That every three
(3) years thereafter, the amount herein stated shall be adjusted to its present value using the
Consumer Price Index, as published by the Philippine Statistics Authority (PSA);

"(Q) Lease of a residential unit with a monthly rental not exceeding Fifteen thousand pesos
(₱15,000);

"(R) Sale, importation, printing or publication of books and any newspaper, magazine, review
or bulletin which appears at regular intervals with fixed prices or subscription and sale and
which is not devoted principally to the publication of paid advertisements;

"(S) Transport of passengers by international carriers;

"(T) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic or international transport operations;

"(U) Importation of fuel, goods and supplies by persons engaged in international shipping or
air transport operations: Provided, That the fuel, goods, and supplies shall be used for
international shipping or air transport operations;

"(V) Services of bank, non-bank financial intermediaries performing quasi-banking functions,

and other non-bank financial intermediaries;

"(W) Sale or lease of goods and services to senior citizens and persons with disability, as
provided under Republic Act Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754
(An Act Expanding the Benefits and Privileges of Persons With Disability), respectively;

"(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;

"(Y) Association dues, membership fees, and other assessments and charges collected by
homeowners associations and condominium corporations;
 "(Z) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);

"(AA) Sale of drugs and medicines prescribed for diabetes, high cholesterol, and
hypertension beginning January 1, 2019; and

"(BB) Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts
do not exceed the amount of Three million pesos (₱3,000,000).

Q-6:

Can on-line international air carriers opt to be under the VAT system and be subject to VAT at zero-rate
on their outbound international operations similar to domestic air carriers registered as domestic
corporations?

A-6:

No. The business of an international air carrier is exempt from VAT because it is a sale of services subject
to percentage tax. If the main business is exempt from VAT, the VAT-exempt person can not elect that
the said exempt business/es be placed under the VAT system. The option to be subject to VAT on its
exempt transactions is available only to a VAT-registered person pursuant to Section 109(2) of the Code,
as amended by R.A. 9337.

Q-30:

Can an international airline company who is engaged in other activities subject to VAT, i.e. leasing of
properties, etc., elect that all its business activities be subject to VAT?

A-30:

No. The main or principal business of an international airline company is VAT-exempt because the same
is subject to the percentage tax under Title V of the Tax Code. Therefore, the international airline can
not elect that its exempt principal business be subject to VAT even if its secondary businesses are
subject to VAT.

Q-31:

How do we determine the main or principal business of a taxpayer who is engaged in mixed business
activities?

A-31:

In determining the main or principal business of a taxpayer, we apply the pre-dominance test. Under
this test, if more than fifty percent (50%) of its gross sales and/or gross receipts comes from its
business/es subject to VAT, its main/principal business falls within the VAT system making its status as a
VAT person. Otherwise, he cannot be considered as a VAT person eligible for the election provided for
under Section 109(2) of the Tax Code.

SEC. 4.109-2. Exempt Transactions May be Registered for VAT Purposes. — A VAT-registered person
may, in relation to Sec. 236 (H) of the 1997 Tax Code, as amended, elect that the exemption in Sec.
4.109-1(B) hereof shall not apply to his sales of goods or properties or services. Once the election is
made, it shall be irrevocable for a period of three (3) years counted from the quarter when the election
was made except for franchise grantees of radio and TV broadcasting whose annual gross receipts for
the preceding year do not exceed ten million pesos (P10,000,000.00) where the option becomes
perpetually irrevocable.

Illustration 6: WPM is a rice dealer. His total annual gross sales and/or receipts do not exceed Three
Million (P3,000,000.00), allowing him to avail the following:

(a) WPM is a VAT-exempt taxpayer. He may elect to avail of the optional registration for VAT of exempt
person under Section 236 (H) of the 1997 Tax Code, as amended. Upon election of such option, he shall
not be entitled to cancel his VAT registration for the next three (3) years;

(b) WPM may elect to pay the 8% commuted tax rate on gross sales or receipts and other non-operating
income in lieu of the graduated income tax rates and the percentage tax under Section 24(A)(2)(b) of
the 1997 Tax Code, as amended, since his gross sales or receipts did not exceed Three Million Pesos
(P3,000,000) during the taxable year. If he elects to pay the 8% commuted tax, he shall not be allowed
to avail of the optional registration for VAT of exempt person provided by Section 236(H) of the 1997
Tax Code, as amended.

SEC. 4.109-2. Exempt Transactions May be Registered for VAT Purposes. — A VAT-registered person
may, in relation to Sec. 236 (H) of the 1997 Tax Code, as amended, elect that the exemption in Sec.
4.109-1(B) hereof shall not apply to his sales of goods or properties or services. Once the election is
made, it shall be irrevocable for a period of three (3) years counted from the quarter when the election
was made except for franchise grantees of radio and TV broadcasting whose annual gross receipts for
the preceding year do not exceed ten million pesos (P10,000,000.00) where the option becomes
perpetually irrevocable.

WPM is a rice dealer . His total annual gross sales and/or receipts do not exceed Three Million
(P3,000,000.00), allowing him to avail the following:

(a) WPM is a VAT-exempt taxpayer. He may elect to avail of the optional registration for VAT of
exempt person under Section 236 (H) of the 1997 Tax Code, as amended. Upon election of such
option, he shall not be entitled to cancel his VAT registration for the next three (3) years;

(b) WPM may elect to pay the 8% commuted tax rate on gross sales or receipts and other non-
operating income in lieu of the graduated income tax rates and the percentage tax under Section
24(A)(2)(b) of the 1997 Tax Code, as amended, since his gross sales or receipts did not exceed Three
Million Pesos (P3,000,000) during the taxable year. If he elects to pay the 8% commuted tax, he shall
not be allowed to avail of the optional registration for VAT of exempt person provided by Section
236(H) of the 1997 Tax Code, as amended.