BIR Ruling [DA-191-03]

June 18, 2003 BIR RULING [DA-191-03] Sec. 109 (w) BIR Ruling No. 20-2002 Admiral Realty Company, Inc . 2138 Roxas Blvd., Manila Attention: Ms. Ma Cristina A. Picazo Treasurer Gentlemen : This refers to your letter dated June 3, 2003 requesting for a ruling on whether or not the sale of two (2) parcels of land by Admiral Realty Company, Inc. ("ADMIRAL") to GGTT Realty Corporation ("GGTT") is subject to the ten percent (10%) value-added tax (VAT). It is represented that ADMIRAL is a corporation duly organized and existing under the laws of the Republic of the Philippines, organized primarily to "purchase or otherwise acquire, own, hold, use, occupy, improve, develop, subdivide, mortgage, let on lease, take on lease, sell, convey and in every manner deal in and with and dispose of real estate, buildings and other improvements, hereditaments, easements and appurtenances of every kind and nature in connection therewith, wheresoever situated, or any estate or interest therein of any nature or description, to the fullest extent permitted by law"; that ADMIRAL is the registered owner of two (2) parcels of land located in Iznart Street in Iloilo City with an aggregate are of Two Thousand Five Hundred Thirty Nine (2,539) square meters, and more particularly described in and covered by Transfer Certificates of Title Nos. T-21121 and T-50191 of the Registry of Deeds of Iloilo City; that on the said parcels of land there used to be a building that was leased to tenants; that sometime in October 1997 the building was demolished due to its dilapidated condition; that since October 1997 the parcels of land have remained idle; and that on May 2, 2003, ADMIRAL executed a Deed of Absolute Sale in favor of GGTT, wherein for and in consideration of the purchase price in an amount of Fifty Million Seven Hundred Eighty Thousand Pesos (P50,780,000.00), ADMIRAL sold, ceded, transferred and conveyed absolutely unto GGTT the abovementioned two (2) parcels of land. In reply, please be informed that pursuant to Section 105 in relation to Section 106, both of the Tax Code of 1997, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties, is collected from any person, who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, which tax shall be paid by the seller or transferor. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial activity, including transactions incidental thereto. In the case of De la Rama Steamship Co. vs. Comm. of Internal Revenue , CTA Case No. 1499, March 5, 1967, an incidental transaction has characterized to be as "[w]here something is done as mere incident to, or as a necessary consequence of, the principal business, it is not ordinarily taxed as an independent business itself. What is usually taken as essential is the main activity in which the taxpayer is engaged. All the various transactions tending to better accomplish the principal end in view must be treated as merely incidental." ( BIR Ruling No. 020-2002 dated May 13, 2002 ) Although the subject properties were not included in ADMIRAL's inventory of properties primarily held for sale to customers or held for lease in the ordinary course of trade or business, as only the building previously erected therein was the one being held for lease, the sale of the same is incidental to the principal business of ADMIRAL; hence, done in the course of its trade or business. CScaDH In the light of your representation that ADMIRAL is indeed engaged in the purchase or acquisition, occupation, improvement, development, lease, sell or disposition of real estate, buildings and other improvements, hereditaments, easements and appurtenances of every kind and nature in connection therewith, this Office is of the opinion as it hereby rules that the sale by ADMIRAL of its two (2) parcels of land which remained idle from the time the building erected therein was demolished in October 1997 until they were sold in May 2003 to GGTT Realty Corporation ("GGTT") is subject to the ten percent (10%) VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours; Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group