BIR Ruling [DA-305-06]

May 10, 2006 BIR RULING [DA-305-06] Section 109 (w); DA-669-2004 JN Romblon Consulting Unit C, 3/F Tempus Place II 21 Matalino Street, Diliman, Quezon City Attention: Mr. Jose N. Romblon Chief Executive Officer Gentlemen : This refers to your letter dated April 10, 2006 requesting in behalf of your client, Filipinas Shutters, Inc. for an exemption from the Value Added Tax pursuant to the provisions of Section 109(w) of the Tax Code of 1997 and Revenue Regulations 16-2005. It is represented that Filipinas Shutters, Inc., a domestic corporation registered and existing under Philippine laws is engaged in the business of preparing, manufacturing, processing or molding steel for doors, windows, walls, etc. and other allied steel products or articles such as but not limited to, namely: Industrial Steel Products or items, Spring Steel Rolling Doors, Spring Steel Rolling Windows, Spring Steel Rolling Walls, etc., and to sell all its products or items exclusively for wholesale, or otherwise employing machines, apparatus, among others; that it executed a proposed Deed of Absolute Sale with PhilFoam Furnishing Industries, Inc. for the sale of two (2) parcels of land with improvements covered by Transfer Certificates of Title Nos. 610769 and 610770 both for the Register of Deeds of Rizal; that Filipinas Shutters, Inc. sustained tremendous business reverses and has to dispose of some assets to be able to pay its obligations; and that you opine that the sale should not be subject to the value-added tax since it is not engaged in the realty business. In reply, please be informed that Section 109(w) of the Tax Code of 1997 and Section 4.109-1(B)(p) of Revenue Regulations No. 16-2005, provides as follows: "Section 109. Exempt Transactions . The following shall be exempt from value-added tax: "(w) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, house and lot and other residential dwellings valued at One million pesos (P1,000,000) and below; Provided, That not later than January 31st of the calendar year subsequent to the effectivity of this Act and each calendar year thereafter, the amount of One Million pesos (P1,000,000) shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office; xxx xxx xxx". SEC. 4.109-1. VAT-Exempt Transactions . (B) Exempt transactions . . . . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT: xxx xxx xxx (p) The following sales of real properties are exempt from VAT, namely: TcEaAS (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business." The term "primary" is defined as "first, principal, chief, leading, or first in order of time, or development, or in 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. 046-98, it was held that the sale by Eastern Canumay Industrial Development Corporation of its property to Ultimate Innovations Corporation, which is engaged in the production of 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. More recently, in VAT Ruling No. 034-01, dated June 13, 2001, it was reiterated that the sale of real property may only be imposed the 10% VAT (now 12%) provided the same is primarily held for sale to customers or held for lease in the ordinary course of trade or business. 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. Thus, inasmuch as the real properties are not among the stock in trade of Filipinas Shutters, Inc., and due to the fact that it is not primarily engaged in the buying and selling of real properties, nor in the leasing of properties, it follows that the absolute sale of said properties is exempt from VAT pursuant to Section 4.109-1 of Revenue Regulations No. 16-2005 implementing now Section 109(w) of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service