BIR Ruling [DA-358-03]

October 10, 2003 BIR RULING [DA-358-03] RR No. 7-95 DA-223-6-8-98 Vicente E. Reyes And Associates P.O. Box 2939 22 Tirad Pass, Quezon City Attention: Mr. Amado P. Galang Partner Gentlemen : This refers to your letter dated March 10, 2003, requesting in behalf of your client, Tropical Hut Food Market, Inc., for a ruling on the interpretation of the phrase "Transactions Deemed Sale" as provided for in Revenue Regulations No. 7-95. It is represented that your client closed its San Joaquin-Pateros branch located at Sto. Rosario, Silangan Pateros and Baymart branch, located at lower Bicutan, Taguig, in 2002; that a request for the cancellation of business registration and permits for the use of cash register machines was forwarded to the respective BIR Revenue District Offices which have jurisdiction over the said branches; that all the inventories of goods on hand, supplies and materials, as well as transferable fixed assets like equipment, tools and utensils, were transferred to other branches; that leasehold improvements which cannot be detached from the building without destroying the same were abandoned and charged off in the books of accounts of the client; that you submitted documents showing accounting entries on the treatment of these abandoned improvements; that the so called abandoned leasehold improvements of your Baymart branch were not written off because the same were used as a warehouse for the equipment of closed branches; that all the returns filed by Tropical Hut Foodmart, Inc. with this Office are consolidated returns; and that it is your opinion that the closure of the two branches of your client is not covered by the phrase "retirement or cessation of business", since it still has a lot of other branches operating in various places in Metro Manila; that the transaction is not considered as a transaction deemed sale; and that no 10% output tax or VAT recovery is due for the book value of the leasehold improvements that were abandoned since the same cannot be detached from the main building. In reply, please be informed that Section 4.100-4 of Revenue Regulations No. 7-95 provides as follows: "SEC. 4.100-4. Transactions Deemed Sale . (a) The following transactions shall be deemed sale pursuant to Section 100(b) of the Code. "(A) . . . "(B) . . . "(C) . . . "(D) Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor. The following circumstances shall, among others, give rise to "transactions deemed sale" for purposes of this Section; TECIHD "(i) Change of ownership of the business; "(ii) Dissolution of a partnership other than a general partnership and creation of a new partnership which takes over the business." Based on documents submitted to this Office, this Office is of the opinion that the closure of your San Joaquin Pateros Branch and Baymart Branch is not considered as a "transaction deemed sale" since there is no change in ownership, or a retirement or cessation of the business. Only the abandoned leasehold improvements of your San Joaquin-Pateros branch were written off while those of your Baymart branch were not written off because the latter served as a warehouse for the equipment of your closed branches. Thus the leasehold improvement which were not written off from your books are not considered as retired. Accordingly, your query as to whether or not your client can offset the payment of the output tax or VAT recovery based on the book value of the leasehold improvements that were abandoned because the same cannot be detached from the main building, as prepaid output tax deductible from the output tax of the corporation as a whole is hereby allowed. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different from that as represented, then this ruling shall be considered null and void. EICDSA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group