BIR Ruling [DA-513-99]

September 3, 1999 BIR RULING [DA-513-99] Balmeo Bautista Peasales Law Offices Rm 309 Margarita Building J.P. Rizal cor. Cardona Streets Makati City Attention: Atty . Leonides F . Balmeo Gentlemen : This refers to your letter dated August 2, 1999 stating that your client, William Gothong & Aboitiz (WG&A), Inc., a corporation engaged in the transportation of cargoes and passengers, owned a luxury liner used for carriage of passenger (mostly tourist) christened as Mabuhay Sunshine which cannot be operated on profit because of the lack of luxury liner passengers and because of the big maintenance cost of said vessel; and that since the vessel was for sometime left idle, WG&A decided to sell Mabuhay Sunshine. Based on the foregoing, you now request for a ruling whether the said isolated transaction selling of Mabuhay Sunshine is subject to 3% common carriers tax or to 10% VAT considering that WG&A is not in the business of selling vessels. In reply thereto, please be informed that since WG&A is engaged in the business of transporting passengers, it is subject to the 3% common carrier's tax (Section 117 of the Tax Code of 1997) and therefore such activity is exempt from VAT pursuant to Section 109(j) of the same Code. In relation thereto, your sale of Mabuhay Sunshine is exempt from both the 3% common carriers and the 10% VAT since such transaction is merely incidental to your main line of business. This is supported by the following: "Where something is done as a mere incident to, or as a necessary consequence of, the principal business, it is not ordinarily taxed as an independent business in itself. What is usually taken as essential is the main activity in which the taxpayer is engaged. All the various transactions tending to better accomplish the principal end in view must be treated as merely incidental to the principal purpose of the business, in the absence of circumstances evidencing a different intent." (De La Rama Steamship Co. vs. Commissioner of Internal Revenue, CTA Case No. 1499, March 25, 1967; see also City of Manila vs. Fortune Enterprises, L-14096, July 26, 1960) While the said isolated transaction is incidental to your common carriage business, it does not follow that the gross receipts that you derived therefrom may be subjected to the 3% common carrier's tax since this percentage tax is levied only on the gross receipts representing compensation for the carriage of passenger (BIR Ruling No. 224-90 dated November 29, 1990). Such sale can neither be subject to 10% VAT since a single sale of one unutilized vessel is an isolated transaction and not in furtherance of its business activity. (VAT Ruling No. 208-90 dated November 15, 1990) cdlex This ruling is being issued on the basis of the facts 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue