Commissioner of Internal Revenue v. Court of Tax Appeals

SPECIAL FOURTH DIVISION [CA-G.R. SP No. 29994. March 11, 1997.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs .COURT OF TAX APPEALS, MAGSAYSAY LINES, INC.,BALIWAG NAVIGATION, INC.,FIM LIMITED OF THE MARDEN GROUP (HK) and NATIONAL DEVELOPMENT COMPANY , respondents . D E C I S I O N CALLEJO , SR. , J p : This is a " Petition for Review ", under Supreme Court Circular No. 1-91, dated February 27, 1991, to set aside Respondent Court's (1) Decision dated April 27, 1992 in CTA Case No. 4353, entitled " Magsaysay Lines, Inc . et al . ,versus Commissioner of Internal Revenue ", ordering herein Petitioner Commissioner of Internal Revenue "to refund in favor of herein Private Respondents Magsaysay Lines, Inc., Baliwag Navigation, Inc. and FIM Limited of the Marden Group (HK), for and in behalf of the National Development Corporation, Value-Added Tax (VAT) paid amounting to FIFTEEN MILLION ONE HUNDRED TWENTY THOUSAND PESOS (P15,120,000.00) and (2) Resolution dated December 9, 1992 denying Petitioner's Motion for Reconsideration of said Decision dated April 27, 1992. As borne by the records, the Petition at bench stemmed from the following antecedental backdrop. During the period from 1981 to 1984, the National Development Company ("NDC",for brevity),a 100% government-owned corporation, contracted with the Philippine Dockyard Corporation, the Construction of five (5) 3,700 DWT Tween-Docker, "Kloeckner" type vessels. They were then leased, on a bareboat basis, to Luzon Stevedoring Company, a wholly-owned subsidiary. These vessels were subsequently transferred and leased, on a bareboat basis, to the National Marine Corporation ("NMC",for brevity),another 100% fully-owned subsidiary of NDC. In line with the privatization efforts of the government, the NDC offered, for sale, as one lot, and by public bidding, all of its shares of stocks in NMC and five (5) NDC-owned "Kloeckner" vessels operated by NMC. The terms and conditions for the public auction sale of said shares of stock and vessels were contained in an "Information Memorandum",which included, inter alia ,the following terms: "VI. CLARIFICATIONS ON TAX AND INSURANCE ISSUES 1.1 Taxes due 1.1.1 Value Added Tax (VAT) A value added tax of 10% on the value of the vessels shall be paid by the winning bidder .(Emphasis supplied) 1.1.2 Documentary Stamps the winning bidder shall pay for all the documentary stamps in connection with the importation of the sale. 1.1.3 Capital Gains Tax The capital gains tax on the NMC shares of stock shall be paid by NPC, the seller." (Exhibit B-1; par. 7, Petition, CTA Case No. 4353) The bidding was held on June 3, 1988. On that same date, Private Respondent Magsaysay Lines, Inc.,for and in behalf of a new company still to be formed, offer to buy all of NDC's shares in NMC and the five (5) vessels for P168,000,000.00. The new company to be formed was to be composed of Magsaysay Lines, Inc.,Baliwag Navigation, Inc.,and FIM Limited of the Marden Group (HK),with a 30:30:40 ratio in shareholdings, respectively. An "irrevocable Standby Letter of Credit with No. EO-DOM-STY 11327" was submitted in favor of NDC, to the extent of P16,800,000.00 to cover at least 10% of the total bid. In a " Notice of Award " dated July 1, 1988, NDC informed Private Respondent Magsaysay Lines, Inc. that its bid was approved by the Committee on Privatization (COP) in its meeting held on June 9, 1988. In the meantime, the law office of Sycip, Salazar, Hernandez and Gatmaitan, in a letter dated September 27, 1988, requested Petitioner to issue a ruling on the applicability of the VAT on the sale of assets by NDC under the terms and conditions of which the winning bidder, Private Respondents herein, would pay instead of NDC, the seller. Private Respondents believed that the sale of said vessels should not be subject to the VAT. LexLib On September 28, 1988, the " Contract of Sale " implementing the award was executed between NDC and the Private Respondents Paragraph 11.02 thereof provided that: "11.02. All capital gains taxes for the sale of the NMC Shares shall be for the account of the SELLER. All documentary stamp taxes for the transfer of the NMC Shares shall be for the account of the PURCHASER. Value-added tax, if any, shall be for the account of the PURCHASER ." ( EXHIBIT G-2 Records of CTA Case No . 4353, Emphasis supplied for emphasis .) On the same date, NDC confirmed its previous agreement with Private Respondents that, in lieu of the immediate payment of the VAT, the irrevocable confirmed Letter of Credit filed, as bidders bond, will be accepted by NDC as security for the payment of the VAT, if any. Letter of Credit No EO-DOM-STY-11327, amounting to P16,800,000.00 was amended to reflect the lower amount of P15,120,000.00, or 10% of the purchase price of the five (5) vessels. It was further agreed upon that, if no favorable ruling is received from the BIR, NDC may draw on said Letter of Credit, upon written demand, an amount needed for the payment of the VAT on due date, that is, December 20, 1988. On December 15, 1988, Private Respondent Magsaysay Lines, Inc. requested Petitioner to waive any surcharge or penalty which may be due in the event of the issuance of a BIR Ruling that VAT was payable on the sale of said vessels. Petitioner granted the request until such time as the question on the payment of VAT for that particular transaction was finally settled. On January 4, 1989, Private Respondents received VAT Ruling No . 568-88 dated December 14, 1988 ,the pertinent portion of which states: "In reply, please be informed that since NDC is VAT registered under VAT Registration No. 35-2-000880 on its sale of services, its transactions incident to its normal VAT registered activity of leasing out personal property including sale of its own assets that are movable tangible objects which are appropriate or transferable are subject to the 10% value-added tax . This finds support in VAT Ruling No. 395-88." ( Emphasis supplied .) VAT Ruling No. 395-88 dated August 18, 1988, addressed to the Senate-Chairman of the Blue Ribbon Committee, specifically referred to the same transaction regarding the sale of NDC's five vessels, Petitioner ruled that the sale would still be subject to VAT, citing as reasons therefor the following: "2. Since NDC operates like a holding company with various interests/investments in other companies operating for profit, its functions are purely proprietary. In spite of the fact that NDC is the owner of the vessel it does not pay 3% common carriers' tax but rather it registered for VAT purposes as a lessor of personal property pursuant to Section 102 of the Tax Code as amended by EO 273. "3. ...The following are provided in the terms of bidding in tax and insurance issues. " Taxes due 1. VAT. A value-added tax of 10% on the value of the vessels shall be paid by the winning bidder. xxx xxx xxx ...that even if the sale or disposition of assets is not within the normal business of NDC . It will still be subject to the VAT based on the bid price. Such activity requires the issuance of a VAT sales invoice before issuing a VAT-official receipt pursuant to Section 21 of Revenue Regulations 5-87. This finds support in VAT Ruling No. 366-88 and modifies VAT Ruling No. 196-88." ( Emphasis supplied .) Private Respondents moved for the reconsideration of VAT Ruling Nos. 395-88 and 568-88. On March 10, 1989. Private Respondents received VAT Ruling No . 007-89 dated February 24, 1989 reiterating Petitioner's decision in VAT Ruling Nos . 395-88 and 568-88 that the sale of vessels by NDC (a VAT-registered taxpayer engaged in the leasing of said vessels) is subject to VAT. Private Respondent Magsaysay Lines, Inc. requested for reconsideration of VAT Ruling No. 007-89. Meanwhile, instead of joining the request, NDC insisted on drawing on the " Letter of Credit ",filed by Private Respondent Magsaysay Lines, Inc.,to answer for the payment of the VAT on the sales transaction. The VAT of P15,120,000.00 was paid, on March 16, 1989, as evidence by Central Bank Confirmation Receipt No. B-16374703 ( Exhibit "I",Records CTA Case No . 4353 ). pred Without waiting for Petitioner's decision on the request for reconsideration of VAT Ruling No. 007-89. Private Respondents herein filed an " Appeal and Petition for Refund " on April 10, 1989 and a " Supplemental Petition for Review "on July 14, 1989 praying for the reversal of VAT Ruling Nos. 395-88, 568-88 and 007-89 and the refund of VAT payments amounting to P15,120,000.00. By virtue of an assessment notice dated June 28, 1989. Petitioner prayed for payment of the amount of P784,534.89 representing unpaid interest for late payment of VAT. Private Respondents filed their claim for refund with Petitioner on July 13, 1989. On April 27, 1992, Respondent Court promulgated the herein assailed Decision, the decretal portion of which reads: "ACCORDINGLY, respondent Commissioner of Internal Revenue is ordered to refund in favor of petitioners Magsaysay Lines, Inc.;Baliwag Navigation, Inc. and FIM Limited of the Marden Group (HK) for and in behalf of the National Development Corporation the VAT paid amounting to P15,120,000.00 under Confirmation Receipt No. B 16374703 dated March 16, 1989. "Without pronouncement as to costs. "SO ORDERED," ( ANNEX " A " of the Petition ; Page 90, Rollo .) Thereafter, the Petitioner filed a " Motion for Reconsideration " of the aforesaid Decision which was denied by Respondent Court in a Resolution dated December 9, 1992 .( ANNEX "B" of the Petition ; Page 111, Rollo .) copy of which was received by Petitioner on January 6, 1993 .On the same date, Petitioner Filed, before this Court, a Motion ( Pages 1-4, Rollo ) praying for an extension of thirty (30) days, from January 7, 1993 until February 6, 1993, within which to file a Petition for Review . After the pertinent records of the case had been transmitted by the Petitioner to the Office of the Solicitor General (OSG),the OSG, on February 5, 1993 ,filed in behalf of Petitioner a second Motion for Extension (Page 67, Rollo ) of thirty (30) days, from February 6, 1993 until March 8, 1993, within which to file the Petition for Review .In the caption of same Motion ,the OSG indicated the number and title of the case below wherein the Respondent Court of Tax Appeals rendered its subject Decision and Resolution .However, the case number of the present case was left blank considering that the OSG had not yet received, by then, any resolution on the aforementioned first motion for extension, on which the case number may be determined. After the filing of the second motion for extension, the OSG received, on February 11, 1993 ,this Court's Resolution dated February 3, 1993 granting the first motion for extension "with a warning that no further extension shall be entertained," whereupon the OSG, in a Manifestation and Motion dated February 16, 1993 ( Pages 17-18, Rollo ),begged the indulgence of this Court to grant the second motion for extension, as said Resolution ,dated February 3, 1993, was only received by the OSG after the requested period in the first motion for extension had already lapsed. On March 8, 1993, within the period requested in the second motion for extension, the OSG filed, by registered mail, the instant Petition for Review .Subsequently, however, it was learned that the second motion for extension was given a separate case number (CA-G.R. SP No. 30130) and assigned to the First Division of this Court, which issued a Resolution dated March 3, 1993 ( Page 70, Rollo ) denying said motion for alleged lack of showing that the same was filed within the reglementary period of appeal. As a consequence, Petitioner, on March 22, 1993, filed a " Manifestation and Motion " ( Pages 63-66, Rollo ) requesting the retrieval, from the Special First Division, of its second " Motion for Extension of Time to File Petition for Review on Certiorari " dated February 5, 1993, and prayed that the said motion be considered as filed in CA-G.R. SP No. 29994. In a Resolution issued on April 2, 1993 ( Page 189, Rollo ),the Special First Division of this Court ordered the withdrawal of CA-G.R. SP No. 30130 on the ground that it was a duplication of CA-G.R. SP. No. 29994 already assigned to the Eighth Division of this Court. On April 27, 1993, Private Respondents filed, with the then former Eighth Division of this Court, a " Manifestation and Motion to Dismiss "( Pages 113-121, Rollo ) praying for the dismissal of Petitioner's " Petition for Review ",filed, on March 8, 1993 on the ground that his Court had no jurisdiction to accept or entertain the Petition for Review ,the same having been filed beyond the reglementary period of appeal provided by law, as a result of which the Respondent CTA's decision dated April 27, 1992, subject of said Petition, had already become final, executory and unappealable. On May 3, 1993, the Eighth Division of this Court issued a Resolution ( Page 123, Rollo ) denying admission of, and dismissing the " Petition for Review " filed on March 8, 1993; whereupon Petitioner filed, on May 24, 1993, a " Motion for Reconsideration " ( Pages 124-129, Rollo ) to set aside this Court's Resolution dated May 3, 1993 and to give due course to the Petition for Review .On July 27, 1993, the former Special Eighth Division issued a Resolution ( Page 123, Rollo ) granting the Motion for Reconsideration dated May 3, 1993 and directing Private Respondents to comment, on the Petition for Review ,within ten (10) days from notice, copy of which Resolution was received by Private Respondents on August 2, 1993. Forthwith, Private Respondents filed, with the Supreme Court, on August 12, 1993, a " Petition for Certiorari and Prohibition With Urgent Prayer for Restraining Order ",praying that: "1. The Petition be given due course as the only plain, speedy and adequate remedy in the course of law; 2. A writ of certiorari and prohibition be issued against Respondent Court of Appeals (Former Special Eighth Division) setting aside and annulling the following resolution(s) issued in CA-G.R. SP No. 29994; a. Resolution dated February 3, 1993; and b. Resolution dated July 27, 1993. 3. During the pendency of this Petition, restraining Respondent Court of Appeals from further proceeding with CA-G.R. SP No. 29994 and from requiring Petitioners to file a comment to the petition for review; 4. After proper proceedings in the case, to declare Respondent Court of Appeals as without jurisdiction to revise, alter or modify the decision of the Court of Tax Appeals dated April 27, 1992 in CTA Case No. 4353." ( Pages 139-156, Rollo .) cdll and a corollary " Manifestation and Motion " ( Pages 136-138, Rollo ), before this Court, on August 13, 1993, praying that proceedings in the Petition at bench be temporarily suspended until such time as the Supreme Court shall have finally resolved the Petition before it in G.R. No. 111184. On August 12, 1996, the Supreme Court promulgated its Decision in G.R. No. 111184, entitled " Magsaysay Lines, Inc . ,et al . ,versus Court of Appeals, et al .",declaring in part: "We therefore hold that it would be ill-advised to allow petitioners to prevail on mere technicality and compel a refund of the non-insubstantial amount of P15 million without affording the government reasonable opportunity to contest the assailed CTA ruling. In any event, the subject petition for review had actually been filed on March 8, 1993, the last day of the period prayed for in the second motion for extension, so there is no further delay to speak of. And we cannot conceive of any additional undue prejudice which may befall the petitioners in the event the appeal is heard on the merits, for if their cause is valid and truly meritorious, petitioners will prevail in the end anyway. "As for the period of extension granted, although the rules provide for fifteen days, we reiterate that, in meritorious cases the Court of Appeals may grant a longer period. In a few highly exceptional instances, this Court has allowed the relaxing of the rules on the application of the reglementary period of appeal, particularly in the case of Republic vs . Court of Appeals ,where this Court allowed the perfection of an appeal by the Republic despite the delay of six days to prevent a gross miscarriage of justice, inasmuch as the Republic stood to lose hundreds of hectares of land already titled in its name and devoted for educational purposes. "WHEREFORE, in view of the foregoing, the instant Petition is hereby DISMISSED ,no grave abuse of discretion having been committed by respondent Court, and the assailed Resolution are AFFIRMED in toto .No costs. "SO ORDERED." The issue on the timeliness of the Petition at bench having been laid to rest, this Court will now delve into, and resolve, the Petition on its merits, the grounds whereof were outlined by the Petitioner, to wit: (1) Respondent CTA erred in holding that the sale by NDC of the five (5) vessels to Private Respondents was exempt from VAT, despite the explicit provisions of the law subjecting the same to VAT. (2) Respondent CTA erred in holding that the assessment on Private Respondent of interest for late payment of VAT was without legal basis. The focal and decisive issue We are tasked to resolve, in the Petition at bench, is whether or not the sale by NDC of its five (5) vessels to herein Private Respondents is subject to the ten per cent (10%) VAT . Private Respondents aver that, pursuant to the provisions of Section 99 of the National Internal Revenue Code (NIRC),in relation to Section 100 of the same Code, the sale by NDC of the subject vessels is not subject to VAT as the sale was made not in the course of NDC's trade or business of leasing personal property. Private Respondents ratiocinated that: (a) NDC is not engaged in the business of selling vessels; and (b) the sale of the vessels was involuntary as the transaction was entered into only in compliance with the privatization program of the national government, as mandated by Proclamation No. 50. Section 99 of the NIRC, quoted infra provides that: "SEC. 99. Persons liable . Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code. Whether or not the herein transaction involving the sale of the five (5) vessels of NDC was made in the course of trade or business of NDC is material to the determination of its liability for the payment of the 10% VAT which may be due. We take heed of the Decision of the Supreme Court in " Commissioner of Internal Revenue versus Court of Appeals ", G . R . No . 104151, March 10, 1995, 242 SCRA 289 ," thus, "...These 'privilege taxes on business' are taxes imposed upon the privilege of engaging in business. They are essentially excise taxes. To be held liable for the payment of a privilege tax, the person or entity must be engaged in business. .. "'To engage' is to embark on a business or to employ oneself therein. The word 'engaged' connotes more than a single act or a single transaction; it involves some continuity of action. 'To engage in business' is uniformly construed as signifying an employment or occupation which occupies one's time, attention, and labor for the purpose of a livelihood or profit. The expressions 'engage in business,' 'carrying on business' or 'doing business' do not have different meanings, but separately or connectedly convey the idea of progression, continuity, or sustained activity .'Engaged in business' means occupied or employed in business, 'carrying on business' does not mean the performance of a single disconnected act, but means conducting, prosecuting, and continuing business by performing progressively all the acts normally incident thereto; while 'doing business' conveys the idea of business being done, not from time to time, but all the time. xxx xxx xxx ". . . The terms 'business,' as used in the law imposing a license tax on business trades, and so forth, ordinarily means business in the trade or commercial sense only, carried on with a view to profit or livelihood. It is thus restricted to activities or affairs where profit is the purpose, or livelihood is the motive. Since the term 'business' is being used without any qualification in our aforecited tax code, it should therefore be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood. ( Emphasis supplied for emphasis .) A review of the records in the Petition at bench will reveal that NDC, or the NMC, a 100% fully-owned subsidiary of NDC, to which the vessels were subsequently transferred, was engaged in the business of leasing the subject vessels on bareboat basis. Based on the definition of the Supreme Court, supra .We accord our approbation to the finding and declaration of the Respondent Court that indeed, the particular transaction involving the sale of the five (5) vessels between NDC and Private Respondents was one not made in the course of NDC's regular trade or business, or, for that matter, necessary to carry out such trade or business. Patently, it was an isolated transaction even of an involuntary nature, having been entered into in accordance with the privatization policy of the government. Thus, Respondent Court did not err in concluding that the sale of the subject five (5) vessels was not a " sale " taxable under Section 99 of the NIRC. Respondent Court, however, committed a reversible error when it failed to apply, and rely on, Section 100(b) of the NIRC, as implemented by Revenue Regulations No. 5-87, dated September 1, 1987, quoted, infra ,as follows: "SEC. 4. Transaction "deemed sale" . The following transactions are "deemed sale" pursuant to Section 100(b): (a) Transfer, use or consumption, not in the course of business. Transfer of goods not in the course of business can take place when the VAT-registered person withdraws goods from his business for his personal use; (b) Distribution or transfer to shareholders or investors as share in the profits of the businesses; (c) Transfer to creditors in payment of debt or obligation; llcd (d) Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned. Consigned goods returned by the consignee within the 60 day period is not deemed sold; and (e) Retirement from or cessation of business or death of an individual 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 of successor, estate or heir. The following circumstances shall, among others, give rise to transactions " deemed sale " for purposes of this Section : (i) Change of ownership of business or incorporation of the business in the case of a single proprietorship; (ii) Dissolution of a partnership and creation of a new partnership which takes over the business; and (iii) Death of an individual who is a VAT-registered person, even if the estate or heirs of the decedent shall continue to operate the business. ( Emphasis supplied for emphasis .) We are convinced that, while the subject sales transaction involving the five (5) vessels may not be considered a "sale", envisaged in Section 99 of the NIRC, which is a general provision, it is, and it should be, considered a "sale" within the purview of Section 100(b) of the NIRC ,as implemented by Section 4 of Revenue Regulations No . 5-67 ,which enumerates the transactions "deemed sale" subject to the 10% VAT. We find and so declare that the subject sales transaction is a " sale " subject to VAT under Section 4(E)(i) .Undeniably, when NDC offered, for sale, as one lot and by public bidding, all of its shares of stock in NMC, and the subject five (5) NDC-owned "Kloeckner" vessels operated by NMC, to the Private Respondents group of private companies, a corresponding change in the ownership of NMC resulted. As to whether or not this change of ownership in NMC way have been brought about by the privatization policy of the government, the law, or Section 4(E)(i) of Revenue Regulations No . 5-67 ,does not distinguish, and the rule chiseled in case law is that: "Well-recognized is the rule that where the law does not distinguish, courts should not distinguish. Ubi lex non distinguit nec nos distinguere debemos No distinction is to be made in the application of a law where none is indicated. ( Pilar versus Commission on Elections, G . R . No . 115245, July 11, 1995, 245 SCRA 759, 763 .) We do not subscribe to Respondent Court's pose that, "a public auction sale of NDC's assets in compliance with the privatization program of the government clearly raises an issue involving a classification statute".Since the law is express and unambiguous, the same must be, as it should be, applied according to its express terms. Indeed, as our Supreme Court declared, "where the language of a statute is clear and unambiguous, the law is applied according to its express terms, and interpretation would be resorted to only where a literal interpretation would be either impossible or absurd or would lead to an injustice." ( Ramirez versus Court of Appeals, G . R . No . 93833, September 26, 1995, 246 SCRA 590 .) What should, therefore, be applied in the Petition at bench is the well-entrenched principle governing tax exemptions that is, that "exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority" primarily because "taxes are the lifeblood of government and their prompt and certain availability is an imperious need ( Province of Tarlac versus Alcantara, G . R . No . 65230, December 23, 1992, 216 SCRA 790, 797-798 .) Tax exemptions must be strictly construed against the taxpayer and liberally in favor of the state. Consequently, to be exempted from payment of taxes, the taxpayer is tasked to justify the exemption "by words too plain to be mistaken and too categorical to be misinterpreted." ( Province of Tarlac versus Alcantara, supra .) Therefore, since Private Respondents are claiming exemption from the payment of the 10% VAT due on the subject sales transactions involving the five (5) vessels of NDC, they are burdened to prove the factual and legal basis therefor in the Petition at bench, the Private Respondents failed to discharge their burden. The liability of the Private Respondents for the 10% VAT due on the subject sales transactions having been adequately established, and there being no question that payment thereof was belatedly made. Private Respondents are liable for interests thereon amounting to P734,534.89, as computed in the BIR assessment notice dated June 28, 1989, pursuant to Section 249 of the NIRC, in relation to Section 25 of Revenue Regulations No. 5-87. LLjur IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench is hereby GIVEN DUE COURSE and GRANTED. Respondent Court's Decision dated April 27, 1992 ,and its Resolution dated December 9, 1992 ,are hereby REVERSED and SET ASIDE. Private Respondents are ordered to pay Petitioner, jointly and severally, the amount of P734,534 . 89 ,representing the 20%/annum unpaid interest for late payment (December 20, 1988 to March 16, 1989) of VAT, as computed in the BIR assessment notice dated June 28, 1989. SO ORDERED. Paras and Reyes * ,JJ . , concur. Footnotes * Acting Senior Member.