BIR Ruling [DA-218-06]

April 7, 2006 BIR RULING [DA-218-06] Frabelle Fishing Corporation 1051 North Bay Boulevard Navotas, Metro Manila Attention: Mr. Valentino C. Labanda Accounting Department Head Gentlemen : This refers to your letter dated March 20, 2006 stating that your company is engaged in deep sea fishing; that in your operation, you are using vessels for fishing, and that however, when you buy additional vessels for the said operation, you do not recognize the input tax paid since you are a VAT exempt company, as the said input tax forms part of your cost. In connection therewith, you now request for ruling as to whether or not the sale of your fishing vessels, which is an incidental transaction, is subject to value-added tax. In reply thereto, please be informed that Section 105 in relation to Section 106 of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337, a value-added tax equivalent to 10% (now 12%) 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 of 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 or economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. (Sec. 4.105-3, Revenue Regulations No. 16-2005) Thus, in the case of Magsaysay Lines, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 4353, April 27, 1992 , the Court of Tax Appeals held that the sale by the National Development Company of five (5) vessels leased in the course of business is not subject to VAT since the sale is not in the course of trade or business. The said Court reasoned that the phrase " in the course of trade or business " does not contemplate an activity that can no longer be repeated or carried on with regularity. On the other hand, the word " incidental " contemplates an activity that necessarily follows the carrying out of the primary function. Since the sale of vessels is not necessary in the carrying out of NDC's primary function of leasing personal properties, it should not be subject to VAT. ( BIR Ruling No. 024-05 dated December 23, 2005 ) WHEREFORE, premises considered , this Office holds that since your company is engaged in deep sea fishing and its sale of fishing vessels is not in the course of its business but merely incidental to its primary function, the sale of fishing vessels is not subject to 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. LibLex Very truly yours, (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service