MAGSAYSAY LINES, INC.; BALIWAG NAVIGATION, INC.; FIM LIMITED OF THE MARDEN GROUP (HK), AND NATIONAL DEVELOPMENT COMPANY v. COMMISSIONER OF INTERNAL REVENUE

I I REPUBLIC OF THE PHILIPPINES COURT OF T~X ~ PPE AL S QUEZON CITY MAGSAYSAY LINES, INC. ; BALIWAG NAVIGAT ION, INC. ; FIM LIMITED OF THE MARDEN GROUP <HK>; AND NATIONAL DEVELOPMENT COMPANY, Petit i or-,ers, C.T.A. CASE NO. 4353 COMMI SSIONER OF INrERNAL REVENUE, x - - - - - -- - Resp0 r-1dent. --------- X DE C I I 0 N Petitioners see~ the refund of the v alue-added tax <VAT> paid on the sale by the National Development Company �:-:�f i t s ve ss els urH:let~ the pt~ivatization pr�ogt~am of the government. M:?.gsaysay L :i. nP s, and Baliwag existing under Philippine laws , while petitioner FIM Limited of <HK> is a corp0ration National Developri'Jent Cor11 pany (NDC), a 1.00'1- g�:�vet~r-, mer,t- r::owned cot~ pot�� ation, 1s i mpleaded as ir,di s pen s able party petitionet~ in j t s c:?.pacity -3s the s.ellet~ of subject v essels and in whose name and in its behalf the 10'1- VAT 304

DECI S ION C. T.A . CASE NO . 4 353 - 2- imposed on the s ale of sa id vessels were paid by petitioners Magsaysay Line s, Inc.; Baliwaq Na vi gat ion, Inc., and FIM Limited of the Marden Group <HI-{) as p u t' c h a s e r s . During the period 19 81 to 1984, NDC cor.t t' act ed with the Ph i. l i p pi r.e Do c ky at'd the const t'uct ion of five ( 5 ) 3,700 DWT Tween - Decket', - 11 K1 o eck.r1et' 11 typ e ves sels. They were then leased o n a barebc�at basis to Luzon Stevedoring Company, a wholly- owned subs idiary. These vessels were subseq uently leased, on a bare boat basi s , to the Natio n al Marine Corporation <NMC> another 100~ fully - owned subsidiary of NDC [E x h. PJ. In line with the pri vatization efforts of the the NDC offered for s ale as one lot and by public bidding all of it s s h ares of s t ock in NMC and five ( 5 > ND C-owned "K l oeckner�� ll vesse 1 s oper��at ed by NMC. The term s and conditions for the publi~ auction sale of said s h ares of stock and vessel s are contained "Infor'wation l't1emor-andum" lE><h. BJ. Ir.cluded ir�, the tet' ms of the bidding are: 1. 1. 1. Value Ad ded Tax <VAT> - A y~!Y� ~~~~1 i~~ of 10~ on the value of the vessels � b ~!! ~� Q~!~ ~y ib� ~]._ !:JD.!. rm .~.!.~ 9�!::� l~n9. �!.:.U. ni.rm 305

DECI S ION C.T.A. CASE NO. 4353 - 3- 1. 1.2. Documentary Stamps - lhe winning bidder shall pay for a ll the documentary stamps in connection with the implementation of the sale. 1. 1.3. Capital Gains Tax - The capital gain s tax on t h e NMC shares of stbck shall be paid by NDC, the S�~11�~t�' ." [Exh. B-- 1.; pat' . 7, Petitior,; Admitted pa t' . 1 of Answet�' ]. The bidding was held on June 3, 1988. On t h at same date, petitioner Mag saysay Lines, Inc., for and in behalf of a new company still to be formed, offered to buy all of NDC's shares in NMC and the 5 vessels for P168,000,000.00. The new company to be formed will be co;:.mposed of: Magsaysay L i r1es, :r l'�,c. ; Ba 1 i wag Nav i gat i em, and FIM Limited of the Marden Group (HK> with a 30:30:40 ratio shareholdings r espectively [ Ex h CJ. An irrevocable Standby Letter of Credi t with No . EO-DOM- STY 11327 was submitt e d infavor of NDC to the ex tent of P16,800,000.00 to cover at least 10~ of the to tal bid [Exh. DJ. In a "Noti ce of Awat-� d" dated July 1, 1 '388, NDC informed petitioner Magsaysay Lines, Inc. that its bid ..i . wa s approved by th e Committee on Privatization <COP > i n its meeting held on June 9, 1 98 8 [Exh . E; see also E xh. G- 1 J. In the meantime, the law office o f SyCip, 306

DECISION C.T.A. CASE NO . 4 353 - 4- Hernandez & Gatmaitan in a lett er dated Septembet~ 27, 1988 requested respondent to is s ue a ruling on the applicability of the VAT on th e sale of assets by NDC which, under the terms and conditions of the sale, the winning bidder, petitioners herein, will pay i nstead of the seller <NDC> [Exh FJ. Petitioners believe that the sale of said vessels should not be subject to the VAT. On September 28, 1988, the Contract of Sale i mplementing the award was executed between NDC and the petitioners [Exh GJ. Paragraph 11.02 thereof provided that: " 11.02. All capital gains taxes fot~ the sale of the NMC Shares s hall be for the account of the SELLER. All documentary stamp taxes for the transfer of the NMC S hares shall be for the account of the PURCHASER. ~~!yg = ~~~�~ i~~L i f ~D~L � ~~!! ~� f Q~ i~~ ~��QYDi Qf ib~ e\J.8!;;;H8�s;f3. II [Exh. G-C::, ~f!!Q~~�i� Qy~� � J On the same date, NDC confirmed its previous agree ment with petitioners that in l ieu 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 CExh. HJ. The Letter of Credit No. EO - DOM-STY-11327 a mounting to P16,800,000.00 was amen ded to ref l ect the lower amount of P15 , 120 , 000.00 or 10% of the purchase price of the five (5) vessels [Exh. IJ. It was further agreed upon 3 0'('

DECISION C.T.A. CAS E NO. 435 3 -5 that if no favorable ruling is r eceived f r o m the BIR, NDC may draw on said Letter of Credit u por-r Wt' itt er-r de mand an amount needed for the pay ment of the VAT on due date, that i s , Decembet' 2 0, 1'388. On Decembet' 15, 1'388, petitionet' Magsaysay Lines, I Y"tC . requested re s pondent to waive any surcharges or penalties in the event BIR rules that VAT is payable on t h e sale of said vessels [Exh. J, par. 1 E,, Pet it i o:�r-r; Admitted in par. 1 of Answer]. Respondent granted t h is re q uest until suc h time as the question on the VAT has actually b e er-r settled. EExh. J�- 1, pat'. 16, Petit ior-r; Ad mi t ted ir-r pat' . 1 O:��f Answet' l. On January 4, 1'38'3, pe titioners received through the same law office, VAT Ru 1 i r-rg No. 5 6 8 - 88 dated Decembet' 14, 1':388 EExh. RJ. The pet�t i nent pot�t ion of the ruling states: "In t�eply, please be infot' med that s ir-rce NDC is VAT ~egistered under VAT Registrati o n No. 35-2- 000880 on its sale o f services, i ~~ i~eD�e�iiQD� iD�iQ�Di i9 ii� DQ~m~! ~8I ~�gi�i~~�Q ~�iiYii~ of leasing out personal property including s ale of its o wn assets that at'e mo:�vable, tangible objects which at' e appropriable or tran s ferable ~~~ �Ybl��i iQ !Q! ih~ Y~!~�=~QQ�Q i~~� This finds s upport in VAT Ru 1 i r-rg No. 3'35 - 88. " [~r!H:;!!J.�i� Q~!:�� J VAT Rulir-rg No. 3'35- 88 dated August 18, 1'388 [Exh. P J a ddressed to the Senate - Chairman of the Blue Ribbon Committee specifically refers to� the same trans action 308

DECI SION C. T.A . CASE NO. 4 353 - 6- regarding the sale of NDC's five vessels. ruled that the sale would still be subject to VAT ci ting as reasons the following: 11 2. Since NDC op et~ ates like a holdirsg company with various interests/investments in ot het~ cc�mpars i es opet~a t i ng fc�t~ pt~eof i t , i t s ftmctiorss at~e ps_n~ely pt~ �_:�pt~ietat~y. Irs s p i t e of the fact that NDC is the owner of the ves sel it does neot pay 3~ common carriers' tax but rather it regi ste red for VAT purpeoses as a lessor of personal preoperty purs u a nt teo Section 102 of the Tax Code as amended by EO 273. 3. x x x. The feolleowing are preovided in the terms of bidding in tax and insurance issues: 1. VAT .:.. A va 1 ue-added tax of 10~ ors ) the value of the vessels shall be paid by the wi nrs i r�g b i ddet~ . XXX XXX X X x. II xxx that even if the sale or disposition of asset s Qf is DQt ~iib in th~ DQ~m~! ~Y~ iD~�� ~R!;;, it wi 11 st i 11 be subject to the VAT based on the bid price. Such activity requ ires 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 to VAT Ruling No. 366-88 and meodifies VAT Ruling N�::.. 1'36- 88. II [~m!~~!ining Qy~�� J Petitioners meoved for the receonsideration of VAT 3'35-88 and 568- 88. 1o, 1'38'3, petitioner recieved VAT Ruling No. 007-8'3 dated February 24, 1'38'3 [Exh. SJ reiteratfng respeondent's decision in VAT Ruling Nos. 3'35- 88 and 568- 88 that the sa le of vessels by NDC (a VAT-registered taxpayer engaged in the 30~

DECISION C. T. A. CAS E NO. 4 353 - 7- leasing of said ve s sels) is subject to VAT. Petitioner Magsaysay Lines, Inc. t~ equested for of VAT Ruling No. 007--8'3. instead of joining the reque s t, NDC insisted on drawing the Letter of Credit filed by petitioner <Magsays ay Inc. ) to pay t h e VAT on the sales transaction. The VAT of P15, 120,000.00 was paid on March 16, 1'38'3 as e v iden ced b y Central Ba n k Confirmat ion Recei p t No. B 16374703 CExh. TJ . Without waiting for respondent's d ecision on the for reconsideration of VAT Ruling No. 007 - 8'3, petitioners filed herein "Appeal and Petition for Refund" on Apt~ i l 1. 0, 1. 989 and a "Supp 1. emerd~ ;d Petit iol"� fot~ Review" on July 1'+, 198'3 pt~ayir�g fc�r the t~ evet~ sal of VAT Ruling Nos. 395-88, 568 - 88 and 007 - 8'3 and the refund of VAT payment amounting to P1 5 , 120 , 000.00. Petitioners fi l ed their claim for refund with respondent on July 13, The only issue before this Court is whether or not the sale by NDC of its vessels to petitioners is s ub ject to the 10~ VAT. Before deciding the iss ue, this Court will first resolve the question raised by respondent Commissioner t h at Magsaysay Lines, Inc. ; Bali wag Nav i gat i or., Inc . ; and FIM Limited of the Marde n Group <HK > are not the real parties in interest. ~ l(J

DECISION �' C.T.A. CASE NO. 4353 - 8- In his An s wer, respond ent Magsaysay Lirtes, Inc.; Baliwag Navigatior., Inc. ; artd FIM Limited of the Marden Group <HK> at~ e not the t' ea l parties in interest entitled to the amo unt so ug ht to be refunded or credited si nce th ey are not transferors or sellers as contempl ated in Sections 99 and 100 of the Tax C.:�de. Section 99 prov ides: 11 Sec . 99. ~gt~2Q!:!� .U.�..!;!lg - Any pet~sort wh o:� , i Yt the cotn~ se o::�f t t~ade ot~ bu s i Yte ss, sells, barters or exchanges goods, renders services , or engages in si milar transactions and any p erso n wh o imports good s shal l be subject to the va lu e -- added tax <VAT> imposed irt Sectio::�n s 100� to 102 of this Code. 11 Re s ponderrt' s theot' Y is devoid of met~ i t . Respond ent ha s consistently ru led that VAT, as art i Ytd i rect tax, can be pa ssed O::�Y�� [see VAT Ru 1 i Ytq No:�s. 235-89 dated Se ptember 13, 1989 a nd 256-8 9 dated Oc t o ber 13, 1989]. Indirect taxes are those that are demanded in the first instance from one person in the expectation a n d i~tention t h at he can s hif t the burd en to some one else. [Commissioner of Internal Revenue v. Jbhn Gotamco & Sons Inc., 148 SCRA 36 (1987>; citing Pollock v. Farmers,/~ &T Co., 1957 US 4 29 , 15 S .CT. 673, 39 La w. Ed. 759. J "The S upt~e me Co�Jt~t, spea king tht~ough Justice Fel icianc� , in the case of Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing ) 311

DECISION C.T.A. CASE NO. 435 3 - '3 - Corporat i on and The Co urt of Ta x Appeals , G. R. No . De ce mb e t~ 2 , 1991., h ad the occasir:�n to r� ule in a Resolutior-t En Bane that "a ~pet~s or-t liable fot~ tax' has been h eld to be . a ' person s ubject to tax' a nd pro perly consi d ered a 'taxpayer'. [ Ho u s ton St r eet Co rpo ration v. Commissioner of Internal Revenue , 84 F . 2 n d. 821 (1936 >; Bank of America v. Anglim, 138 F. 2 nd. 7 (1'343J.J The terms ' l iab l e for tax' and 'subject to tax' both connote legal obligation o r duty to pay a tax . It is very d i ffi cu 1t, indeed conceptually i rnpossi b le, to consider a person who is s tatutorily ma de 'lia b le for tax' a s DQt 's ubject to tax.' By any reason a ble standard, such a person should be regarded a s a party in interest, or as a person having s ufficient legal interes t, to bring a suit fo r r ef und of t a x es h e believes were illegally c c�ll ec t e d ft~o m him . " In this case , it is undisputed that the qu~stioned VRT collected on t h e s a le of five ( 5 ) vessels was p assed o n the purc h aser s [ Magsaysay Lines, I YtC. ; Ba l iwag Navigation, Inc. and FIM Li mited of the Marden Group <HKJJ, p u r s ua n t to the ter ms of the bidding lE><h. B- 1] and t o the Contract of Sa le CE xh. G- 2J. Beir-tg the p ersons or entitie s liable to pay the VAT, pet it i c�net~ s as p urchaser s a r e cons i d ered to be person s s u bject to the VRT since the burden has been shifted to th em. In a nd in fact NDC h a s dra wn the a mo unt of 312

DEC I SI ON C.T.A. CASE NO . 4353 - 10 - P15, 120,000.00 from the Lett er of Credit charged to the account of petitioners [Exh. MJ. Therefore, petitioners ) should not be precluded from fil ing this s uit si nce they can be considered real parties in interest. It is not amiss to state Section 2 of Rule 3, Revised Rules of Court, which provides in part: in .. SEC. 2 . t~~t:ii-_ ~� irr~.�t:��~� Evet"'Y action must be prosecuted and defended in th e name of the real party in int e rest. 8!! R�~�Qn� b~~ing ~n inig~g�i in ib� �Y~i��i gf ibg ~�iiQn ~n~ in Q~i~ining ibg ~g!!gf ~�rr!~.H:!~�~~- �b.~ll ~� j~_:i:.!.'}�Q �,� Rl~iniiff?. � X>< X � " CYn~gr�QQrinn �YQ R!ig~.J; ar1d Sect ior, l l of R. n. No. 1125, as amended, which provides: "SEC. 11.. ~QQ�~!� 8nY person, association or �Q~RQr~iiQ!.':.! ~~Y�~��!Y ~ff�Qi�~ ~y ~ decision or rYlinn gf ibg ~Qffii��iQn�~ gf !nig~n~l Rg~gnyg , o r the Commissioner of Customs or any provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax nppeal s within thirty days after the receipt o f such dec i s i o:�n o t~ t~ u 1 i ng. x x >< � " EYn!J�~ �QQ~.to g Qy~�.] held: "the t~eal pat~ty ir�, intet~es t is the p a t~ ty wh o:� would be benefited or injured by the judgment , or ' the party entitled to the avails of the s uit' (1 Sutherland, Court Pleadir1g Pt~actice & Fo:ot~ms, p.11>." [ Salonga v . Warner Barnes & Co., Ltd ., 125, l. 31 ( 1.951 ) ] � Petitioners Magsaysay Lines, Inc. Baliwag Navigati on, Ir.c. and FIM Limited of t he Marden Group <HK) 313

DECIS ION C. T.A. CASE NO. 4 353 - 11 - parties a dverse ly affect e d by the ruling o f respondent and therefore as s uch are entitled to file t h e appeal. We go back t o the main issue o n t he applicability of the VAT provisions o n the sa le b y NDC of the five (5) vessels to petitioners . Petiti o ner s stress that the sale by NDC of the five ( 5 ) vessel s doe s not fall within the pUt'V i. e w C1f Section 99 o f the Tax Code si nce said sale was not in the cour s e of trade or bu s i r1e s s . Petitioners arg ue that: (a) NDC is n .:~t engaged ir, the business 1:1f sel ling v esse ls; a nd (b) the �sale of the vesse l s was involuntary as the transaction was e nt ered on ly to comply with the privati zat ion program of the national governm ent man d at - ed by Proclamation No. 50. Section 1 of Proclamation No. 50 reads : "SECTION 1. S tatemer,t o f Pc�l i c y. It s h a ll be the policy of the State to promote privatization through an o rder ly, c oordi nated and efficient prog ra ms for the prompt disposition of the large number of non- perf o r ming assets of the government fin a ncia l insti tutio n s a~d c ertain government - owned or con tro ll e d corporations whi c h have been found unnecessary or inappropriate for the gov e t��nrnelr,t s ecto t' to maint ain. 11 Respc�r1dent, o n t he other hand maint ains that th e sa le is s ub ject to th e 10'1. vA �r. He empha s ized that si nce NDC is VAT - registered the sale of its five ( 5)

DECISION C.T.A. CASE NO. 4353 - 12 - vessels operated by NM C is incidental to VAT-regi stered activity of leasing out personal property CVAT Ruling No. 568-88]. This position was reiterated in VAT Ruling No. 007-89 whi' ch also states "the fact that NDC carries on a business as a lessor of vessels which are capital assets used in the course of business, does rrcot exclude said sa le from the coverage of the value-added tax merely because its business is that of leasing arrd rr ot of sellil' rg vessels". Section 3 of Revenue Regulation No. 5 - 87 was cited by respondent as basi s for its ruling. Section 3 pt~ovides irr pat~t that the "v aluP.-adde d tax is imposed orr any sale or transactions ' deemed sale' of taxable good s (il'rcludirrg capital goods, it�� t~ e s pective of the date o f ac qui si t iorr) xx><." Due to his de cision to consider the sale of NDC - owrred vessels as a transaction subject to VAT, t~espc�rrd errt Commissioner now seeks from petitioners the payment of P734,534.89 as 20~ interest for late payment orr the 10~ VAT of P15, 120,000.00 fo r the pet' iod Decerr1bet' 21, 1988 (da y following the due date of . VAT payment) to March 16, 1989 <da te of VA T pay ment) plus 20'1. interest on the defici e n c y VAT. The 25~ surcharge was not imposed in view of the memorandum of the Corrlrrl i. ss i orre t' dated December 20 , 1':388 waivin ~~ any surcharges and penalties. 315

DECISION C.T.A. CASE NO. 4353 - 13 - The contention of respondent is n o t pers uasive. We hold for petitioners. Ce ntt�a l to th e resoluti o n of thi s case is an undet�s t ar-td i ng of the meanin g of t he pht� ase "in th e cout�se c�f t t�ade Ot' bus i Yte ss '' ot' "doir-tg bus i Ytess " I Yt Imperial v. Collector of Internal Revenue, G.R. No. L- 7 29 4, September 30, 1955 <9 7 Phil. 992>, the t et' rt1 "carrying on business" does n ot mean the performance of a sing l e di sco nnec ted act, but me ar-ts cond ucting, and COYtt i Ytl.l i YtQ busi n ess b y performing progress ive ly all the acts norma lly i ncident ) whil e "doing business" conveys the idea of business be ing done , not from time to time, but all the time. [J. Ara na s , UPDATED NATIONAL IN TER NAL REVENU E CODE <WITH ANNOTA TI ONS >, P� E.OB -9 (1988)]. "Course of business " is what i s usually done in the ma nag e me nt of tt� ade ot' busir-tess. Cidrni v. Weeks & Russell, '39 So. 751 , 754, 135 Miss. 55, cited in Wor d s & Phrases , Vol . 1 o, ( 1 '38'+) J � Wh at i s clear theref ore, based on the aforecited juri spt�uder-tce, i s that "cout�se of bt.lsir-tess " bus i r-te ss " connotes regularity of activi t y. In th e i n s t ant case, the sale was an i sola ted tra n sac ti o n. Th e sale wh ich wa s involunta ry and made pur s uant to the 316

DECISION C.T.A. CASE NO. 4353 - 14 - declared policy of Government for priv~tization coul d no s hould be emphasized that the normal VAT-reg istered activity of NDC is leasing personal Respondent would want t o impress thi s Court that since NDC is VAT-registered on its sale of services, its transactions incident to its normal . VAT -r egistere~ activity of leasing out personal property is subject to VAT <VAT Ruling No. 558-88). This ruling actually st t~et ches the law when it concluded th at becau se a person is VAT - registered and is s ubject to VAT on its normal VAT - registered activity , t hat all its ot h er activities would a l s o be s ubj ect to VAT. In the particular case of NDC, wh ile it is VAT - t~egi stet'ed ar1d its normal VAT - registered activity of leasing out personal property is s ubject to VAT, it does not follow that its other activities, not specified i Y"l the law, are likewise subject to VAT. Respondent seeks s upport in the provi s ions of the aforecited Section 3 of Revenue Regulation 5-87 that the sale of NDC's vessels is a t r ansaction 'deemed sale' subject t o the 10~ VAT. As correctly ~rgued by petitioners, this citation is out of context. It states the general coverage of VAT and omits the operative ph rase in Section 99 of the Tax Code, whi c h the Regulation see ks to implement, that 311 ,. �

DECISION C. T.A. CASE NO . 4353 - 15 - to be subject tc� Vf~T, the sa le mu st be "irr the cout'?e of Th e VAT Imp 1 emerrt i r-rg Regulat iorrs ( 5-87> cited by t'es porrd er-rt i rrcl r.1de s tt'arrsact ions "deemed sale" of taxable gc�ods. These transactions are listed in Section 100 (b) of the Tax Code and Sect ion 4 of the Revenue Regulations 5-87. For ease of reference, they are reproduced below: "SEC. 100. Value -a dded tax c�rr sale of goods. (a ) Rate and base of tax. x x x. (b) Transactions deemed sale. The following transactions shall be deemed sale : <1> Transfer, use or consumption not in the course of � business of goods originally i n tended for sale or for use in t he course of b u s i r�re ss . (2) Distribution or transfer to: <A> S harehold ers or i nve st ot' S ="'c->- shat'e in the profits of the VAT - t'eg i st ered pet' so::.n; c�t' CB> Creditors in payment of debt. (3) Consignment of goods if actual sale is not made within 60 days following the date such good s were consigned . (/+) Retirement from or cessat ion of busi r-ress, with re s pect to inventorie s o f taxable goods existing as of such retirement or cessat i c�r-r. " "SEC. 1+. !:t:~r.:!29.G.ii~2m~ .:_ gggmgg 2~.!. g' � The following transactions are 'deemed sale' pursuant to Section 100 Cb ) : <A> Transfer, use or consumption, not in the course of bus iness. Transfer of goods n ot 316

DECISI ON C. T . A. CAS E NO. 4 353 - 16 - in the course of busi n ess can take plac e when the VAT - registered per s on withdraws goods from his business for his personal use; <B) Di s tr~ibutioy, or�� tr~ay, sf e r~ shareholders or inves tors as shar~e i n profits of the business; (C) Tran s fer to cr ~ ditors in payment of debt or obligation; (0) Consignment of goods if actual sale is not made withi n 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) Reti r ement from or cessa tion of business or death of an individual with respect to all good s on hand, whether c a pital goods, stock- in- trade, supplies or materials as of the date of s uch retirement or cess ation, whether or not the business is continued by the n e w o wne r or s uc cessor , e s tate or heir. The following circums tances sh a ll, amo ng others, give ri s e to trans actions 'deemed sale' for purposes of this Section: (i) Change of owners hip of bus iness or incorporat ion of the business in the case of a single pt"o pt' i et or~sh i p; (ii) Di s s olutior�, of a par~tr�,er�� s hip ay,d creation of a new partnership which takes over the business; and (iii) Death of an individual who is VAT - regi s tered person , even if the estate or heirs of the decedent s h a ll c ontinue to operate the business." It will be noted that the circumstances of the five (5) vessels would not fall under any of these two enumerations. In the fi~st place, the sale by 319

DECISION C.T.A. CASE NO. 4353 - 17 - public bidding is definitely a sale, not '"' "deemed sale " transaction by operation of law. Nei thet~ is it a "t-r~ar. sfe-r~, u se o-r~ cor.sumption" as explair.ed ir� Section 1+ (a> of the Regulation quoted above, that is, "tt~ ansfer of good s not in the course of business can take place when the VAT -regis tered person withdraws goods from his business for his personal use" . Nei thet~ is it a r�ot~ a ''cor. s igr�.ment of goods''. Nei thet~ do these vessels cor-.stitute "in verrtc�t~ ies of taxa ble goods" exist ir-.g at the time of the retirement or cessation of bu s i r.ess. It should be emphasized that NDC, by the s ale of these vessels, from nor ceased bus i r.ess. is any doubt regarding the issue, the same s hould be resolved in favor of petiti oners. Section 99 of the Tax Code is n ot an exemption s tatute where claims for tax refund are construed strictly agai n st the claimant, but a classification statu te wh ere the rule of interpretation is the reverse . In Commissioner of Internal Revenue v. Ledesma, 3 1 SCRR 95, 111' the Supreme Court, Amet~ i ca r-1 jurisprudence, held in part that: ;, x x x. The pt~ovision eof Sect ior� 2L~ of the Tax Code excluding 'regi stered general ceo-partnership' from the payment of corporate income tax is not an exemption clause but a 32 0

DECISION C.T.A. CASE NO. 4 353 - 18 - classification claus e which must be construed libet~ ally in favot~ of t h e taxpayet~." "A classificatir:�r� s t at ute, ot~ one whi c h specifies the persons or property subject and r�ot subject to a ta><, i s not an exempt ion statute and the general rule x x x that a tax statute will be construed in favor of the taxpayet~ applies <C.J.S . Section 277, p. 443) o II Rever.ue laws imposing taxes on business must be strictly construed in favor of the citi z en. I: Lu zon Stev edori ng Co. v. Co ll ect or of Inter nal Revenue , 4? � ,.J Phil. 803, 809J. In every cas e of doubt, s uch statutes ) are con s trued mos t strongly against the Go vernment and in favor of the citizen, because burdens are not to be i mpr:�sed, presumed to be imposed , beyond what the stat u tes exp t~essly and cleat~ly i mpo t~t . [ Ma n i l a Ra ilroad Company v. Insular Collector o f Customs , 5 2 Phil. 950, 952 ( 1929) ; Comm issi o ner o f I n ternal Rev er. ue v . Fireman's F und Ins . Co., 1'+8 SC f~~1 :.O: l5, 3 2 4 <1'387> J. The same doctrine has been r e iterated in the case of Roxas v. Co urt of Ta x Appe al s, 23 SCRA 276, 28 2 <1.968>. The Supreme Co urt in that case, held : The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to mini mize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uni fot~mly, lest the tax cc�llector ~-i 11 the 'hen that lays the golder� egg'. And, in order to maintain the general public's trus t and confidence in the Government this power must be used justly and not tt~ eachet~ou s ly. x >< x." 321

�' DECISION C.T.A. CASE NO. 4353 - 1'3 - If petitoners claim that NDC is exempt under the provisions of Section 103 of the Tax Code, then the contention of respondent that doubts should be construed strictly against petitioners would be valid as the issue involves an exemption statute. Howevet~ , it is the contention of petiti oners that pursuant to the provisions of Section '3'3, in relation to Section 100 of the Tax Code, the sale by NDC of the vessels is not subject to VAT as the sale is not in the course of trade or business of leasing personal A public auction sale of its asset s in compliance with the privatization program of government clearly raises an issue involving a classification statute. Fot~ i r.deed the sale cannot be classified in the cours e of trade or business. Respondent admitted that even if the sale is not in the course of trade or business still petitioners are subject to VAT as the transaction involving the sales of NDC's vessels are incidental to its normal trade of leasir�g � said vessels. [see VAT Ruling No. 568-88 dated Decem bet~ 14, 1'388, E><h. RJ. "ir.cider.tal" mear.s dependir�g upc�r� or appertaining to something else as primary; sc�meth ing necessat~y, appertaining to, or depending upon another which is termed the prir.cipal. [The Robin Gc�odfellow, 322

DECISION C.T.A. CASE NO. 4353 - 20 - D.C. Wa s h., 2 0 F . 2 d '3'324, '325 ; ci t e d in Words & Ph ra ses , .Vo:�l. 2 0, p. '+1'3 <1 '34 0>J . It mu st be reme mbered t h a t the s ale o f NDC's vessels was p u rs u a nt t o th e g overnment ' s p ri vatiza tio n pr ogram beyo n d t h e c o nt rol o f ND C. The sa le of t h e ve sse ~ s as s u c h are no t nece ssa ry to c ar r y out NDC' s pr i mary f uncti o n o f le a sing personal proper - ties. The act of s elling capital a sset s does no t ne ces - sarily f o ll o w the act o f leas ing thes e ass et s . The sales tr a n sac ti o n wa s a n iso l a t e d case. Arr i so l a ted transact i on d o not thus warran t the impositi o n ther e o n of bu s iness taxe s . [Imperial v. Collector, s u p t~ a. J WHEREFORE, finding the petition for review to be ) meritorious the same is GRANTED. Respondent's VAT Rulirrg Nos. 3'35-88; 568-88 and 007-8'3 are set aside. The Assessment Notice of the Acting Commissioner for Collection dated June 2'3, 198'3, assessing petitioners for the payment of interest totalling P734,534.89, is hereby CANCELLED as the same was issued without legal basis. 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, 1'38'3.

[ DECISION C.T.A. CASE NO. 4353 - 21 - Without pronouncement as to costs. SO ORDERED. Chtezon City, Met t'O t<l.:H,.Ii la, Rpt' i l 27 , 1 3i:~. "tfttJ '\__ CONS NTE ~- ROAOUIN R scociate Judge WE CONCUR: fo~Q.. ~ ERNESTO D. ACOSTA Pt'e s i ch Y"1g Judge A LES Acting A ssociate CE RTIFICATION I h et'eby certify that this decision was t'eached after due consultation among the ~e m bers of the Court of Tax A ppeals � in ac co:ot' dance with ~)ec t io n 1..'3, Rt- t i c l e VIII of the Constitution. ~Q.~ ERNESTO D. ACOSTA Pt'esiding Judge Co u rt of Tax Appeal s )