BIR Ruling [DA-431-06]

July 18, 2006 BIR RULING [DA-431-06] Secs. 196 & 204; 390-87 Frabelle Properties Corporation 1051 North Bay Boulevard Navotas, Metro Manila Attention: Mr. Valentino Labanda Head Accounting Dept. Gentlemen : This refers to your letter dated June 27, 2005 stating that Frabelle Properties Corporation (formerly, FTL and Son's Development Corp.) is a company engaged in the development of real estate, rental and other realty related business; that in 1995, it had sold thru Contract to Sell three (3) units of real property to Mr. Nanik Dayaram; that Mr. Dayaram made a down payment amounting to 30% of the contract price; that the documentary stamp taxes (DST) based on the respective gross selling price of the three units were paid on December 28, 1995 amounting to P122,580.00, P126,345.00 and P126,345.00, or an aggregate of 375,270.00; that on October 7, 1997, Frabelle and Mr. Dayaram mutually agreed to rescind the Contract to Sell; and that as a result of the rescission, Mr. Dayaram will relinquish all his rights and claims over the subject properties by virtue of the Contract to Sell, while Frabelle obligates itself to refund the down payment plus the interest earned. Based on the foregoing, you are requesting in effect for a ruling on the following: 1) Whether or not the above Contract to Sell is subject to the DST:, and 2) If it is not subject, can Frabelle be refunded of the DST payments made in 1995 considering that the said Contract to Sell was rescinded? In reply thereto, please be informed as follows: 1) Agreements to sell real property on installment basis are not subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended, unless they vest title on the vendee. (Sec. 163, Revenue Regulations No. 26, otherwise known as "The Revised Documentary Stamp Tax Regulations, cited in BIR Ruling No. 390-87) In the Contract to Sell executed by and between Frabelle and Mr. Dayaram, it is apparent in the terms and conditions set forth therein that title or ownership over the subject realties was not yet vested with the latter. Accordingly, payment of the DST thereon was not yet warranted. HETDAC 2) The rescission of the above Contract to Sell negates payment of the DST. The DST in the sale transaction by and between Frabelle and Mr. Dayaram will become due only upon full payment by the latter of the total consideration and upon execution of the Deed of Sale or Transfer covering the said transaction. This is so because it is only then that it can be considered that title to the properties is vested with the vendee. Since the Contract to Sell the above properties was rescinded, it did not therefore ripen into a taxable transaction. Thus, the payment of the DST thereon was erroneous. However, considering that the payment of DST was made in 1995, a claim for refund or credit of the same is barred by prescription. Section 204 of the Tax Code of 1997, as amended, provides that no credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after payment of the tax or penalty. Please be guided accordingly. EHTSCD Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service