BIR Ruling [DA-232-06]

April 11, 2006 BIR RULING [DA-232-06] 109 (P); R.R. 16-2005 # 16-2005; VAT Ruling Nos. 046-98 & 034-2001; DA-032-2005; DA-396-2005 Crown Asia 27/F Jollibee Plaza, Emerald Avenue Ortigas Center, Pasig City Attention: Ms. Erma R. Mateo Controller Gentlemen : This refers to your letter dated November 10, 2005 requesting for a ruling that the assignment of movable properties consisting of machineries and equipments for the construction of certain water facilities, as payment for liabilities, is not subject to VAT. Crown Asia Properties, Inc. and Crown Asia Properties (North), Inc. (hereafter the "ASSIGNORS"), all domestic corporations engaged in real estate business, executed a Deed of Assignment on October 20, 2005 in favor of ML&H Corporation (hereafter the "ASSIGNEE"), a domestic corporation duly registered as a holding company. Pursuant to said deed, the ASSIGNORS assigned machineries and equipment for the construction of water facilities in favor of the ASSIGNEE as payment of the liabilities of the ASSIGNORS to the ASSIGNEE. The said machineries and equipment are not included in the inventory of the ASSIGNORS nor held by them primarily for sale to customers in the ordinary course of their trade or business. In reply, please be informed that the term "capital asset" as negatively defined in Section 39(A)(1) of the 1997 Tax Code, as amended, means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34, or real property used in trade or business of the taxpayer. The term "primary" is defined as 'first, principal, chief, leading or first in order of time, or development, or intention' ( Black's Law Dictionary, Sixth Edition ). Thus, to be 'held primarily for sale or lease,' the property must be held with the chief intention of being sold or leased. In VAT Ruling No. 048-98 , it was held that the sale by Eastern Canumay Industrial Development Corporation of its property to Ultimate Innovations, Inc. is not subject to VAT. In this ruling, Easter Canumay Industrial Development Corporation, which is engaged in the production of marble and other marble products, owned several properties, one of which was sold to Ultimate Innovations, Inc. Since the property sold is not primarily held for sale in the ordinary course of trade or business, then its sale is not subject to VAT. Also, in VAT Ruling No. 034-01, dated June 13, 2001 , it was reiterated that since the gas pipeline being sold is not held by FGP Corporation primarily for sale to customers or held for lease in the ordinary course, of its trade or business, considering that its business involves the operation of the aforesaid power generating plant, it follows that FGP Corporation is not subject to VAT with respect to the sale of the gas pipeline, pursuant to the aforesaid provision of the Code and its implementing rules and regulations. ATSIED Further, Section 106(A)(1)(a) of the Tax Code, as amended by Republic Act 9337, subject to VAT, among others, only real properties held primarily for sale to customers or held for lease in the course of trade or business. If the movable properties are not held for sale or lease, the assignment thereof is not subject to VAT. ( BIR Ruling No. DA-564-99 dated September 29, 1999 ) Inasmuch as the ASSIGNORS are engaged in realty business and not in selling or leasing of machineries and equipments for the construction of water facilities, the said movable properties are considered as properties not primarily held for sale or for lease to customers. Moreover, the said properties, being excluded in the stock in trade of the ASSIGNORS nor belonging to other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, said movable properties are properly considered as not actually used in the business of the ASSIGNORS and classified therefore, as capital assets ( BIR Ruling No. 16-2005 dated August 24, 2005; VAT Ruling No. 021-98, dated August 5, 1998; BIR Ruling No. 54-96 dated May 14, 1996; BIR Ruling No. 33-97 dated April 1, 1997 and VAT Ruling No. 072-99, dated July 27, 1999 ). In view of the foregoing, since the machineries and equipments assigned by the ASSIGNORS as payment of their liabilities are capital assets, such assignment is not subject to VAT. ( VAT Ruling No. 034-2001 dated June 13, 2001 and BIR Ruling No. DA-669-2004 dated December 28, 2004 ). 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.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service