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 CIR’s 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 NDC’s 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 NDC’s 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
services16 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 taxpayer’s 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 CTA’s 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 VAT-registered activity of NDC is
leasing personal property.21

This finding is confirmed by the Revised Charter22 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.

 [G.R. No. L-19707. August 17, 1967.]

PHILIPPINE ACETYLENE CO., INC., Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE and COURT OF TAX APPEALS, Respondents.

Ponce Enrile, Siguion Reyna, Montecillo & Bello for Petitioner.

The Solicitor General for Respondents.

SYLLABUS

1. TAXATION; BALES TAX UNDER SECTION 186, NATIONAL INTERNAL REVENUE

CODE; ON WHOM IMPOSED; CASE AT BAR. — Petitioner, Philippine Acetylene Company,
the manufacturer of oxygen and acetylene gases sold to the National Power Corporation, claims
exemption from the payment of sales tax imposed by Section 186 of the National Internal
Revenue Code, because its buyer — the National Power Corporation — is exempt from the
payment of all taxes. It is argued that a sales tax is ultimately passed on to the purchaser, and
that, so far as the purchaser is an entity like the NPC which is tax-exempt, the tax cannot be
collected on the sales. HELD: The tax imposed by section 186 of the Code is a tax on the
manufacturer or producer and not a tax on the purchaser except probably in a very remote and
inconsequential sense. Accordingly its levy on the sales made to tax-exempt entities like the
NPC is permissible.

2. ID.; ID.; ID.; ARTICLE V OF THE MILITARY BASES AGREEMENT CONSTRUED. —

Only sales made "for the exclusive use in the construction, maintenance, operation or defense of
the bases," in a word, only sales to the quartermaster, are exempt under article V from taxation.
Such sales of goods to any other party even if it be an agency of the United States, such as the
VOA, or even to the quartermaster but for a different purpose, are not free from the payment of
the tax.

3. ID.; STATUTORY CONSTRUCTION; TAX EXEMPTION STRICTLY CONSTRUED. —

It is a familiar learning in the American law of taxation that tax exemption must be strictly
construed and that the exemption will not be held to be conferred unless the terms under which it
is granted clearly and distinctly show that such was the intention of the parties. Hence, insofar as
General Circular No. V-41 of the Bureau of Internal Revenue would give the tax exemptions in
the Agreement an expensive construction it is void.

DECISION

CASTRO, J.:
The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene
gases. During the period from June 2, 1953 to June 30, 1958, it made various sales of its products
to the National Power Corporation, an agency of the Philippine Government, and to the Voice of
America, an agency of the United States Government. The sales to the NPC amounted to
P145,866.70, while those to the VOA amounted to P1,683, on account of which the respondent
Commission of Internal Revenue assessed against, and demanded from, the petitioner the
payment of P12,910.60 as deficiency sales tax and surcharge, pursuant to the following
provisions of the National International Revenue Code:jgc:chanrobles.com.ph

"SEC. 186. Percentage tax on sales of other articles. — There shall be levied, assessed and
collected once only on every original sale, barter, exchange, and similar transaction either for
nominal or valuable considerations, intended to transfer ownership of, or title to, the articles not
enumerated in sections one hundred and eighty- four and one hundred and eighty-five a tax
equivalent to seven per centum of the gross selling price or gross value in money of the articles
so sold, bartered, exchanged, or transferred, such tax to be paid by the manufacturer or
producer: . . ."cralaw virtua1aw library

"SEC. 183. Payment of percentage taxes. — (a) In general. — It shall be the duty of every
person conducting a business on which a percentage tax is imposed under this Title, to make a
true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings,
or gross value of output actually removed from the factory or mill warehouse and within twenty
days after the end of each month, pay the tax due thereon: Provided, That any person retiring
from a business subject to the percentage tax shall notify the nearest internal revenue officer
thereof, file his return or declaration and pay the tax due thereon within twenty days after closing
his business.

"If the percentage tax on any business is not paid within the time specified above, the amount of
the tax shall be increased by twenty-five per centum, the increment to be a part of the tax."cralaw
virtua1aw library

The petitioner denied liability for the payment of the tax on the ground that both the NPC and the
VOA are exempt from taxation. It asked for a reconsideration of the assessment and, failing to
secure one, appealed to the Court of Tax Appeals.

The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on
the manufacturer and not on the buyer with the result that the "petitioner Philippine Acetylene
Company, the manufacturer or producer of oxygen and acetylene gases sold to the National
Power Corporation, cannot claim exemption from the payment of sales tax simply because its
buyer — the National Power Corporation — is exempt from the payment of all taxes." With
respect to the sales made to the VOA, the court held that goods purchased by the American
Government or its agencies from manufacturers or producers are exempt from the payment of the
sales tax under the agreement between the Government of the Philippines and that of the United
States, provided the purchases are supported by certificates of exemption, and since purchases
amounting to only P558, out of a total of P1,683, were not covered by certificates of exemption,
only the sales in the sum of P558 were subject to the payment of tax. Accordingly, the
assessment was revised and the petitioner’s liability was reduced from P12,910.60, as assessed
by the respondent Commission, to P12,812.16. 1

The petitioner appealed to this Court. Its position is that it is not liable for the payment of tax on
the sales it made to the NPC and the VOA because both entities are exempt from taxation.

The NPC enjoys tax exemption by virtue of an act 2 of Congress, which provides as
follows:jgc:chanrobles.com.ph

"SEC. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be
exempt from all taxes, except real property tax, and from all duties, fees, imposts, charges, and
restrictions of the Republic of the Philippines, its provinces, cities and municipalities."cralaw
virtua1aw library

It is contended that the immunity thus given to the NPC would be impaired by the imposition of
a tax on sales made to it because while the tax is paid by the manufacturer or producer, the tax is
ultimately shifted by the latter to the former. The petitioner invokes in support of its position a
1954 opinion of the Secretary of Justice which ruled that the NPC is exempt from the payment of
all taxes "whether direct or indirect."cralaw virtua1aw library

We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of
the Code. Is it a tax on the producer or on the purchaser? Statutes of the type under
consideration, which impose a tax on sales, have been described as "act[s] with schizophrenic
symptoms," 3 as they apparently have two faces — one that of a vendor tax, the other, a vendee
tax. Fortunately for us the provisions of the Code throw some light on the problem. The Code
states that the sales tax "shall be paid by the manufacturer or producer," 4 who must "make a true
and complete return of the amount of his, her or its gross monthly sales, receipts or earnings or
gross value of output actually removed from the factory or mill warehouse and within twenty
days after the end of each month, pay the tax due thereon." 5

But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the
purchaser is an entity like the NPC which is exempt from the payment of "all taxes, except real
property tax," the tax cannot be collected from sales.

Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the
phrase "pass the tax on." Writing the opinion of the U.S. Supreme Court in Lash’s Products v.
United States, 6 he said: "The phrase ‘passed the tax on’ is inaccurate, as obviously the tax is laid
and remains on the manufacturer and on him alone. The purchaser does not really pay the tax. He
pays or may pay the seller more for the goods because of the seller’s obligation, but that is all..
The price is the sum total paid for the goods. The amount added because of the tax is paid to get
the goods and for nothing else. Therefore it is part of the price . . ."cralaw virtua1aw library

It may indeed be that the incidence of the tax ultimately settles on the purchaser, but it is not for
that reason alone that one may validly argue that it is a tax on the purchaser. The exemption
granted to the NPC may be likened to the immunity of the Federal Government from state
taxation and vice versa in the federal system of government of the United States. In the early
case of Panhandle Oil Co. v. Mississippi 7 the doctrine of intergovernmental tax immunity was
held as prohibiting the imposition of a tax on sales of gasoline made to the Federal Government.
Said the Supreme Court of the United States:jgc:chanrobles.com.ph

"A charge at the prescribed rate is made on account of every gallon acquired by the United
States. It is immaterial that the seller and not the purchaser is required to report and make
payment to the state. Sale and purchase constitute a transaction by which the tax is measured and
on which the burden rests . . . The necessary operation of these enactments when so construed is
directly to retard, impede and burden the exertion by the United States, of its constitutional
powers to operate the fleet and hospital . . . To use the number of gallons sold the United States
as a measure of the privilege tax is in substance and legal effect to tax the sale.. And that is to tax
the United States — to exact tribute on its transactions and apply the same to the support of the
state."cralaw virtua1aw library

Justice Holmes did not agree. In a powerful dissent joined by Justice Brandeis and Stone, he
said:jgc:chanrobles.com.ph

"If the plaintiff in error had paid the tax and added it to the price the government would have
nothing to say. It could take the gasoline or leave it but it could not require the seller to abate his
charge even if it had been arbitrarily increased in the hope of getting more from the government
than could be got from the public at large . . . It does not appear that the government would have
refused to pay a price that included the tax if demanded, but if the government had refused it
would not have exonerated the seller . . .

". . . I am not aware that the President, the Members of the Congress, the Judiciary or to come
nearer to the case at hand, the Coast Guard or the officials of the Veterans’ Hospital [to which
the sales were made], because they are instrumentalities of government and cannot function
naked and unfed, hitherto have been held entitled to have their bills for food and clothing cut
down so far as their butchers and tailors have been taxed on their sales; and I had not supposed
that the butchers and tailors could omit from their tax returns all receipts from the large class of
customers to which I have referred. The question of interference with Government, I repeat, is
one of reasonableness and degree and it seems to me that the interference in this case is too
remote."cralaw virtua1aw library

But time was not long in coming to confirm the soundness of Holmes’ position. Soon it became
obvious that to test the constitutionality of a statute by determining the party on which the legal
incidence of the tax fell was an unsatisfactory way of doing things. The fall of the bastion was
signalled by Chief Justice Hughes’ statement in James v. Dravo Constructing Co. 8 that "These
cases [referring to Panhandle and Indian Motorcycle Co. v. United States, 283 U.S. 570 (1931)]
have been distinguished and must be deemed to be limited to their particular facts."cralaw
virtua1aw library

In 1941, Alabama v. King & Boozer 9 held that the constitutional immunity of the United States
from state taxation was not infringed by the imposition of a state sales tax with which the seller
was chargeable but which he was required to collect from the buyer, in respect of materials
purchased by a contractor with the United States on a cost-plus basis for use in carrying out its
contract, despite the fact that the economic burden of the tax was borne by the United States.

"The asserted right of the one to be free of taxation by the other does not spell immunity from
paying the added costs, attributable to the taxation of those who furnish supplies to the
Government and who have been granted no tax immunity. So far as a different view has
prevailed, see Panhandle Oil Co. v. Mississippi and Graves v. Texas Co., supra, we think it no
longer tenable."cralaw virtua1aw library

Further inroads into the doctrine of Panhandle were made in 1943 when the U. S. Supreme Court
held that immunity from state regulation in the performance of governmental functions by
Federal officers and agencies did not extend to those who merely contracted to furnish supplies
or render services to the Government even though as a result of an increase in the price of such
supplies or services attributable to the state regulation, its ultimate effect may be to impose an
additional economic burden on the Government. 10

But if a complete turnabout from the rule announced in Panhandle was yet to be made, it was so
made in 1952 in Esso Standard Oil v. Evans, 11 which held that a contractor is not exempt from
the payment of a state privilege tax on the business of storing gasoline simply because the
Federal Government with which it has a contract for the storage of gasoline is immune from state
taxation.

"This tax was imposed because Esso stored gasoline. It is not.. based on the worth of the
government property. Instead, the amount collected is graduated in accordance with the exercise
of Esso’s privilege to engage in such operations; so it is not ‘on’ the federal property . . . Federal
ownership of the fuel will not immunize such a private contractor from the tax on storage. It may
generally, as it did here, burden the United States financially. But since James v. Dravo
Contracting Co., 302 U.S. 134, 151, 82 L ed 155, 167, 58 S Ct 208, 114 ALR 318, this has been
no fatal flaw . . ." 12

We have determined the current status of the doctrine of intergovernmental tax immunity in the
United States, by showing the drift of the decisions following the announcement of the original
rule, to point up the fact that even in those cases where exemption from tax was sought on the
ground of state immunity, the attempt has not met with success.

As Thomas Reed Powell noted in 1945 in reviewing the development of the

doctrine:jgc:chanrobles.com.ph

"Since the Dravo case settled that it does not matter that the economic burden of the gross receipt
tax may be shifted to the Government, it could hardly matter that the shift comes about by
explicit agreement covering taxes rather than by being absorbed in a higher contract price by
bidders for a contract. The situation differed from that in the Panhandle and similar cases in that
they involved but two parties whereas here the transaction was tripartite. These cases are
condemned in so far as they rested on the economic ground of the ultimate incidence of the
burden being on the Government, but this condemnation still leaves open the question whether
either the state or the United States when acting in governmental matters may be made legally
liable to the other for a tax imposed on it as vendee.

"The carefully chosen language of the Chief Justice keeps these cases from foreclosing the
issue . . . Yet at the time it would have been a rash man who would find in this a dictum that a
sales tax clearly on the Government as purchaser is invalid or a dictum that Congress may
immunize its contractors." 13

If a claim of exemption from sales tax based on state immunity cannot command assent, much
less can a claim resting on statutory grant.

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does
the tax becomes a part of the price which the purchaser must pay. It does not matter that an
additional amount is billed as tax to the purchaser. The method of listing the price and the tax
separately and defining taxable gross receipts as the amount received less the amount of the tax
added, merely avoids payment by the seller of a tax on the amount of the tax. The effect is still
the same, namely, that the purchaser does not pay the tax. He pays or may pay the seller more for
the goods because of the seller’s obligation, but that is all and the amount added because of the
tax is paid to get the goods and for nothing else. 14

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the
burden of the tax is largely a matter of economics. 15 Then it can no longer be contended that a
sales tax is a tax on the purchaser.

We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is
a tax on the manufacturer or producer and not a tax on the purchaser except probably in a very
remote and inconsequential sense. Accordingly its levy on the sales made to tax-exempt entities
like the NPC is permissible.

II

This conclusion should dispose of the same issue with respect to sales made to the VOA, except
that a claim is here made that the exemption of such sales from taxation rests on stronger
grounds. Even the Court of Tax Appeals appears to share this view as is evident from the
following portion of its decision:jgc:chanrobles.com.ph

"With regard to petitioner’s sales to the Voice of America, it appears that the petitioner and the
respondent are in agreement that the Voice of America is an agency of the United States
Government and as such, all goods purchased locally by it directly from manufacturers or
producers are exempt from the payment of the sales tax under the provisions of the agreement
between the Government of the Philippines and the Government of the United States, (See
Commonwealth Act No. 733) provided such purchases are supported by serially numbered
Certificates of Tax Exemption issued by the vendee-agency, as required by General Circular No.
V-41, dated October 16, 1947 . . . ."cralaw virtua1aw library

The circular referred to reads:jgc:chanrobles.com.ph

"Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers, or
importers shall be exempt from the sales tax."cralaw virtua1aw library

It was issued purportedly to implement the Agreement between the Republic of the Philippines
and the United States of America Concerning Military Bases, 16 but we find nothing in the
language of the Agreement to warrant the general exemption granted by that circular.

The pertinent provisions of the Agreement read:jgc:chanrobles.com.ph

"ARTICLE V. — Exemption from Customs and Other Duties

"No import, excise, consumption or other tax, duty or impost shall be charged on material,
equipment, supplies or goods, including food stores and clothing, for exclusive use in the
construction, maintenance, operation or defense of the bases, consigned to, or destined for, the
United States authorities and certified by them to be for such purposes."cralaw virtua1aw library

"ARTICLE XVIII. — Sales and Services Within the Bases

"1. It is mutually agreed that the United States shall have the right to establish on bases, free of
all licenses; fees; sales, excise or other taxes, or imposts; Government agencies, including
concessions, such as sales from commissaries and post exchanges, messes and social clubs, for
the exclusive use of the United States military forces and authorized civilian personnel and their
families. The merchandise or services sold or dispensed by such agencies shall be free of all
taxes, duties and inspection by the Philippine authorities . . ."cralaw virtua1aw library

Thus only sales made "for exclusive use in the construction, maintenance, operation or defense
of the bases," in a word, only sales to the quartermaster, are exempt under article V from
taxation. Sales of goods to any other party even if it be an agency of the United States, such as
the VOA, or even to the quartermaster but for a different purpose, are not free from the payment
of the tax.

On the other hand, article XVIII exempts from the payment of the tax sales made within the
bases by (not sales to) commissaries and the like in recognition of the principle that a sales tax is
a tax on the seller and not on the purchaser.

It is a familiar learning in the American law of taxation that tax exemption must be strictly
construed and that the exemption will not be held to be conferred unless the terms under which it
is granted clearly and distinctly show that such was the intention of the parties. 17 Hence, in so
far as the circular of the Bureau of Internal Revenue would give the tax exemptions in the
Agreement an expansive construction it is void.

We hold, therefore, that sales to the VOA are subject to the payment of percentage taxes under
section 186 of the Code. The petitioner is thus liable for computed as follows:chanrob1es virtual
1aw library

Sales to NPC P145,866.70

Sales to VOA P1,683.00

—————

Total sales subject to tax P147,549.70

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7% sales tax due thereon P10,328.48

Add: 25% surcharge P2,582.12

—————

Total amount due and collectible P12,910.60

=========

Accordingly, the decision a quo is modified by ordering the petitioner to pay to the respondent
Commission the amount of P12,910.60 as sales tax and surcharge, with costs against the
petitioner.