COMMISSIONER OF INTERNAL REVENUE vs. SONY PHILIPPINES, INC.

G.R. No. 178697               November 17, 2010

FACTS:
Sony PH incurred an advertising expense which it could not pay due to adverse economic
conditions. Sony-Singapore granted a subsidy to Sony PH equivalent to the advertising expenses
of the latter. Sony PH used such a subsidy to pay the incurred advertising expense. The subsidy
given by Sony-Singapore is assistance or aid in view of Sony’s dire or adverse economic
conditions.
ISSUES:
1) Is the subsidy considered an income?
2) Is the subsidy subject to VAT?
RULING:
1. Yes, the subsidy is considered an income.
The Court ruled that the subsidy may be considered as income and, therefore, subject to
income tax.
2. No, the subsidy is not subject to VAT
The Court does not agree that the subsidy should be subject to the 10% VAT. To begin
with, the said subsidy was not even exclusively earmarked for Sony’s advertising expense for it
was but assistance or aid in view of Sony’s dire or adverse economic conditions, and was only
"equivalent to the latter’s (Sony’s) advertising expenses.
Section 106 of the Tax Code provides that there must be a sale, barter or exchange of
goods or properties before any VAT may be levied. Certainly, there was no such sale, barter or
exchange in the subsidy given by Sony Singapore to Sony Ph. It was but a dole out by Sony
Singapore and not in payment for goods or properties sold, bartered or exchanged by Sony Ph.
Sony did not even render any service to Sony Singapore. The services rendered by the
advertising companies, paid for by Sony using Sony Singapore dole-out, were for Sony and not
Sony Singapore. Sony Singapore just gave assistance to Sony in the amount equivalent to the
latter’s advertising expense but never received any goods, properties or service from Sony.