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Magsaysay Lines VS.


Facts: Pursuant to a government program of privatization, The NDC decided to sell

in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-
Decker, "Kloeckner" type vessels.The vessels were constructed for the NDC
between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also
its wholly-owned subsidiary. Subsequently, the vessels were transferred and
leased, on a bareboat basis, to the NMC. The NMC shares and the vessels were
offered for public bidding. Among the stipulated terms and conditions for the public
auction was that the winning bidder was to pay "a value added tax of 10% on the
value of the vessels." On 3 June 1988, private respondent Magsaysay Lines, Inc.
(Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00.
The bid was made by Magsaysay Lines, purportedly for a new company still to be
formed composed of itself and was approved by the Committee on Privatization,
and a Notice of Award dated 1 July 1988 was issued to Magsaysay Lines who in turn
was assessed of VAT through VAT Ruling No. 568-88 dated 14 December 1988 from
the BIR, holding that the sale of the vessels was subject to the 10% VAT. The ruling
cited the fact that NDC was a VAT-registered enterprise, and thus 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
appropriable or transferable are subject to the 10% [VAT].

CTA ruled that the sale of a vessel was an "isolated transaction," not done in the
ordinary course of NDCs business, and was thus not subject to VAT, which under
Section 99 of the Tax Code, was appliedonly to sales in the course of trade or
business. The CTA further held that the sale of the vessels could not be "deemed
sale," and thus subject to VAT, as the transaction did not fall under the
enumeration of transactions deemed sale as listed either in Section 100(b) of the
Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of
doubt should be resolved in favor of private respondents since Section 99 of the
Tax Code which implemented VAT is not an exemption provision, but a classification
provision which warranted the resolution of doubts in favor of the taxpayer. Hence
CIR appealed the CTA Decision.

Issue:Whether the sale by the National Development Company (NDC) of five (5) of
its vessels to the private respondents is subject to value-added tax (VAT) under the
National Internal Revenue Codeof 1986 (Tax Code) then prevailing at the time of
the sale. The facts are culled primarily from the ruling of the CTA.


VAT is ultimately a tax on consumption, even though it is assessed on many levels

of transactions on the basis of a fixed percentage. It is the end user of consumer
goods or services which ultimately shoulders the tax, as the liability therefrom
is passed on to the end users by the providers of these goods or services who in
turn may credit their own VAT liability (or input VAT) from the VAT payments they
receive from the final consumer (or output VAT). The final purchase by the end
consumer represents the final link in a production chain that itself involves several
transactions and severalacts of consumption. The VAT system assures fiscal
adequacy through the collection of taxes on every level of consumption, yet
assuages the manufacturers or providers of goods and services by enabling them
to pass on their respective VAT liabilities to the next link of the chain until finally
the end consumer shoulders the entire tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its assessment
bears direct relevance to the taxpayers role or link in the production chain. Hence,
as affirmed by Section 99 of the TaxCode and its subsequent incarnations, the tax
is levied only on the sale, barter or exchange of goods or services by persons who
engage in such activities, in the course of trade or business. These transactions
outside the course of trade or business may invariably contribute to the production
chain, but they do so only as a matter of accident or incident. As the sales of goods
or services do not occur within the course of trade or business, the providers of
such goods or services would hardly, if at all, have the opportunity to appropriately
credit any VAT liability as against their own accumulated VAT collections since
the accumulation of output VAT arises in the first place only through the ordinary
course of trade or business.

That the sale of the vessels was not in the ordinary course of trade or business of
NDC was appreciated by both the CTA and the Court of Appeals, the latter doing so
even in its first decision which it eventually reconsidered. We cite with approval the
CTAs explanation on this point:

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955
(97 Phil. 992), the term "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 thereof; while
"doing business" conveys the idea of business being done, not from time to time,
but all the time."Course of business" is what is usually done in the management of
trade or business

Court explained that "course of business" or "doing business" connotes regularity of

activity. In the instant case, the sale was an isolated transaction. The sale which
was involuntary and made pursuant to the declared policy of Government for
privatization could no longer be repeated or carried on with regularity. It should be
emphasized that the normal VAT-registered activity of NDC is leasing personal

This finding is confirmed by the Revised Charter of the NDC which bears no
indication that the NDC was created for the primary purpose of selling real
property. The conclusion that the sale was not in the course of trade or business,
which the CIR does not dispute before this Court, should have definitively settled
the matter. Any sale, barter or exchange of goods or services not in the course of
trade or business is not subject to VAT. Accordingly, the Court rules that given the
undisputed finding that the transaction in question was not made in the course of
trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant
to Section 99 of the Tax Code, no matter how the said sale may hew to those
transactions deemed sale as defined under Section 100. Petition Denied.


FACTS: Petitioner [CS Garment] is a domestic corporation duly organized and

existing under and by virtue of the laws of the Philippines with principal office at
Road A, Cavite Ecozone, Rosario, Cavite. On the other hand, respondent is the duly
appointed Commissioner of Internal Revenue of the Philippines authorized under
law to perform the duties of said office, including, inter alia, the power to assess
taxpayers for [alleged] deficiency internal revenue tax liabilities and to act upon
administrative protests or requests for reconsideration/reinvestigation of such

Petitioner is registered with the Philippine Economic Zone Authority (PEZA) under
Certificate of Registration No. 89-064, duly approved on December 18, 1989. As
such, it is engaged in the business of manufacturing garments for sale abroad.

On November 24, 1999, petitioner [CS Garment] received from respondent [CIR]
Letter of Authority No. 00012641 dated November 10, 1999, authorizing the
examination of petitioners books of accounts and other accounting records for all
internal revenue taxes covering the period January 1, 1998 to December 31, 1998.

On October 23, 2001, petitioner received five (5) formal demand letters with
accompanying Assessment Notices from respondent, through the Office of the
Revenue Director of Revenue Region No. 9, San Pablo City, requiring it to pay the
alleged deficiency VAT, Income, DST and withholding tax assessments for taxable
year 1998 in the aggregate amount of P2,046,580.10

On November 20, 2001, or within the 30-day period prescribed under Section 228
of the Tax Code, as amended, petitioner filed a formal written protest with the
respondent assailing the above assessments.

On January 11, 2002, or within the sixty-day period after the filing of the protest,
petitioner submitted to the Assessment Division of Revenue Region No. 9, San
Pablo City, additional documents in support of its protest.

Respondent failed to act with finality on the protest filed by petitioner within the
period of one hundred eighty (180) days from January 11, 2002 or until July 10,
2002. Hence, petitioner appealed before [the CTA] via a Petition for Review filed on
August 6, 2002 or within thirty (30) days from the last day of the aforesaid 180-day
The case was raffled to the Second Division of [the CTA] for decision. After trial on
the merits, the Second Division rendered the Assailed Decision on January 4, 2007
upon which the Second Division cancelled respondents assessment against CS
Garments for deficiency expanded withholding taxes for CY 1998 amounting
to P47,880.00, and partially cancelled the deficiency DST assessment amounting
to P1,963.00. However, the Second Division upheld the validity of the deficiency
income tax assessments by subjecting the disallowed expenses in the amount
of P14,851,478.83 and a portion of the undeclared local sales P1,541,936.60
(amounting to P1,500,000.00) to income tax at the special rate of 5%. The
remainder of undeclared local sales of P1,541,936.06 (amounting toP41,936.60)
was subjected to income tax at the rate of 34%. The Second Division found that
total tax liability of CS Garments amounted to P2,029,570.12, plus 20%
delinquency interest pursuant to Section 249(C)(3)

On January 29, 2007, CS Garments filed its "Motion for Partial Reconsideration" of
the said decision. On May 25, 2007, in a resolution, the Second Division denied CS
Garments motion for lack of merit. (Citations omitted)

Petitioner appealed the case to the CTA en banc and alleged the following: (1) the
Formal Assessment Notices (FAN) issued by the Commissioner of Internal Revenue
(CIR) did not comply with the requirements of the law; (2) the income generated
by CS Garment from its participation in the Cavite Export Processing Zones trade
fairs and from its sales to employees were not subject to 10% VAT; (3) the sale of
the company vehicle to its general manager was not subject to 10% VAT; (4) it had
no undeclared local sales in the amount of P1,541,936.60; and (5) Rule XX, Section
2 of the PEZA Rules and Regulations allowed deductions from the expenses it had
incurred in connection with advertising and representation; clinic and office
supplies; commissions and professional fees; transportation, freight and handling,
and export fees; and licenses and other taxes.

The CTA en banc affirmed the Decision and Resolution of the CTA Second Division.
As regards the first issue, the banc ruled that the CIR had duly apprised CS
Garment of the factual and legal bases for assessing the latters liability for
deficiency income tax, as shown in the attached Schedule of Discrepancies provided
to petitioner; and in the subsequent reference of the CIR to Rule XX, Section 2 of
the Rules and Regulations of R.A. 7916. With respect to the second issue, the CTA
pronounced that the income generated by CS Garment from the trade fairs was
subject to internal revenue taxes, as those transactions were considered "domestic
sales" under R.A. 7916, otherwise known as the Special Economic Zone Act. With
respect to the third issue, the CTA en banc declared that the sale of the motor
vehicle by CS Garment to the latters general manager in the amount of P1.6
million was subject to VAT, since the sale was considered an incidental transaction
within the meaning of Section 105 of the NIRC. On the fourth issue, the CTA found
that CS Garment had failed to declare the latters total local sales in the amount
of P1,541,936.60 in its 1998 income tax return. The tax court then calculated the
income tax liability of petitioner by subjecting P1.5 million of that liability to the
preferential income tax rate of 5%. This amount represented the extent of the
authority of CS Garment, as a PEZA-registered enterprise, to sell in the local
market. The normal income tax rate of 34% was then charged for the excess
amount of P41,936.60. Finally, as regards the fifth issue, the CTA ruled that Section
2, Rule XX of the PEZA Rules which enumerates the specific deductions for
ECOZONE Export Enterprises does not mention certain claims of petitioner as
allowable deductions.

Aggrieved, CS Garment filed the present Petition for Review assailing the Decision
of the CTA en banc. However, on 26 September 2008, while the instant case was
pending before this Court, petitioner filed a Manifestation and Motion stating that it
had availed itself of the governments tax amnesty program under the 2007 Tax
Amnesty Law. It thus prays that we take note of its availment of the tax amnesty
and confirm that it is entitled to all the immunities and privileges under the law. It
has submitted to this Court the following documents, which have allegedly been
filed with Equitable PCI BankCavite EPZA Branch, a supposed authorized agent-
bank of the BIR:6

1. Notice of Availment of Tax Amnesty under R.A. 9480

2. Statement of Assets, Liabilities, and Net worth (SALN)

3. Tax Amnesty Return (BIR Form No. 2116)

4. Tax Amnesty Payment Form (Acceptance of Payment Form or BIR Form

No. 0617)

5. Equitable PCI Banks BIR Payment Form indicating that CS Garment

deposited the amount of P250,000 to the account of the Bureau of Treasury

On 26 January 2009, the Office of the Solicitor General (OSG) filed its Comment
objecting to the Manifestation and Motion of CS Garment.7

The OSG asserts that the filing of an application for tax amnesty does not by itself
entitle petitioner to the benefits of the law, as the BIR must still assess whether
petitioner was eligible for these benefits and whether all the conditions for the
availment of tax amnesty had been satisfied. Next, the OSG claims that the BIR is
given a one-year period to contest the correctness of the SALN filed by CS
Garment, thus making petitioners motion premature. Finally, the OSG contends
that pursuant to BIR Revenue Memorandum Circular No. (RMC) 19-2008, petitioner
is disqualified from enjoying the benefits of the Tax Amnesty Law, since a judgment
was already rendered in favor of the BIR prior to the tax amnesty availment. The
OSG points out that CS Garment submitted its application for tax amnesty only on
6 March 2008, which was almost two months after the CTA en banc issued its 14
January 2008 Decision and more than one year after the CTA Second Division
issued its 4 January 2007 Decision.

On 8 February 2010, the Court required both parties to prepare and file their
respective memoranda within 30 days from notice.8 After this Court granted the
motions for extension filed by the parties, the OSG eventually filed its Memorandum
on 18 May 2010, and CS Garment on 7 June 2010. It is worthy to note that in its
Memorandum, the OSG did not raise any argument with respect to petitioners
availment of the tax amnesty program. Neither did the OSG deny the authenticity
of the documents submitted by CS Garments or mention that a case had been filed
against the latter for availing itself of the tax amnesty program, taking into account
the considerable lapse of time from the moment petitioner filed its Tax Amnesty
Return and Statement of Assets, Liabilities, and Net Worth in 2008.

On 17 July 2013, the parties were ordered9 to "move in the premises"10 by

informing the Court of the status of the tax amnesty availment of petitioner CS
Garment, including any supervening event that may be of help to the Court in its
immediate disposition of the present case. Furthermore, the parties were directed
to indicate inter alia (a) whether CS Garment had complied with the requirements
of the 2007 Tax Amnesty Law, taking note of the aforementioned documents
submitted; (b) whether a case had been initiated against petitioner, with respect to
its availment of the tax amnesty program; and (c) whether respondent CIR was still
interested in pursuing the case. Petitioner eventually filed its Compliance11 on 27
August 2013, and the OSG on 29 November 2013.12

According to the OSG,13 CS Garment had already complied with all documentary
requirements of the 2007 Tax Amnesty Law. It also stated that the BIR Litigation
Division had not initiated any case against petitioner relative to the latters tax
amnesty application. However, the OSG reiterated that the CIR was still interested
in pursuing the case.


The threshold question before this Court is whether or not CS Garment is already
immune from paying the deficiency taxes stated in the 1998 tax assessments of the
CIR, as modified by the CTA.


Tax amnesty refers to the articulation of the absolute waiver by a sovereign of its
right to collect taxes and power to impose penalties on persons or entities guilty of
violating a tax law.14 Tax amnesty aims to grant a general reprieve to tax evaders
who wish to come clean by giving them an opportunity to straighten out their
records.15 In 2007, Congress enacted R.A. 9480, which granted a tax amnesty
covering "all national internal revenue taxes for the taxable year 2005 and prior
years, with or without assessments duly issued therefor, that have remained unpaid
as of December 31, 2005."16 These national internal revenue taxes include (a)
income tax; (b) VAT; (c) estate tax; (d) excise tax; (e) donors tax; (f)
documentary stamp tax; (g) capital gains tax; and (h) other percentage
taxes.17Pursuant to Section 6 of the 2007 Tax Amnesty Law, those who availed
themselves of the benefits of the law became "immune from the payment of taxes,
as well as additions thereto, and the appurtenant civil, criminal or administrative
penalties under the National Internal Revenue Code of 1997, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and
prior years."

Amnesty taxpayers may immediately enjoy the privileges and immunities under the
2007 Tax Amnesty Law, as soon as they fulfill the suspensive conditions imposed

A careful scrutiny of the 2007 Tax Amnesty Law would tell us that the law contains
two types of conditions one suspensive, the other resolutory. Borrowing from the
concepts under our Civil Code, a condition may be classified as suspensive when
the fulfillment of the condition results in the acquisition of rights. On the other
hand, a condition may be considered resolutory when the fulfillment of the
condition results in the extinguishment of rights. In the context of tax amnesty, the
rights referred to are those arising out of the privileges and immunities granted
under the applicable tax amnesty law.

The imposition of a suspensive condition under the 2007 Tax Amnesty Law is
evident from the following provisions of the law:

While tax amnesty, similar to a tax exemption, must be construed strictly

against the taxpayer and liberally in favor of the taxing authority,30 it is
also a well-settled doctrine31 that the rule-making power of administrative
agencies cannot be extended to amend or expand statutory requirements
or to embrace matters not originally encompassed by the
law.1wphi1 Administrative regulations should always be in accord with
the provisions of the statute they seek to carry into effect, and any
resulting inconsistency shall be resolved in favor of the basic law. We thus
definitively declare that the exception "[i]ssues and cases which were
ruled by any court (even without finality) in favor of the BIR prior to
amnesty availment of the taxpayer" under BIR RMC 19-2008 is invalid, as
the exception goes beyond the scope of the provisions of the 2007 Tax
Amnesty Law.32

Considering the completion of the aforementioned requirements, we find

that petitioner has successfully availed itself of the tax amnesty benefits
granted under the Tax Amnesty Law. Therefore, we no longer see any need
to further discuss the issue of the deficiency tax assessments. CS Garment
is now deemed to have been absolved of its obligations and is already
immune from the payment of taxes including the assessed deficiency in
the payment of VAT, DST, and income tax as affirmed by the CTA en banc
as well as of the additions thereto (e.g., interests and surcharges).
Furthermore, the tax amnesty benefits include immunity from "the
appurtenant civil, criminal, or administrative penalties under the NIRC of
1997, as amended, arising from the failure to pay any and all internal
revenue taxes for taxable year 2005 and prior years."33

WHEREFORE, the instant Petition for Review is GRANTED. The 14 January

2008 Decision and 2 April 2008 Resolution of the Court of Tax Appeals en
banc in CTA EB Case No. 287 is hereby SET ASIDE, and the remaining
assessments for deficiency taxes for taxable year 1998 are hereby
CANCELLED solely in the light of the availment by CS Garment, Inc. of the
tax amnesty program under Republic Act No. 9480.

Lapanday Foods Corp. v. CIR, CTA Case No. 7097, Oct. 18, 2007

Facts: On January 21, 2004, petitioner received a Formal Assessment Notice, with
several Assessment Notices, all dated the same, and was assessed by respondent
for alleged deficiency value added tax (VAT), expanded withholding tax (EWT), final
withholding tax (FWT) and documentary stamp tax (DST).

On February 20, 2004, petitioner filed a formal protest to the disputed

assessments. Thereafter, a supplemental protest was filed by petitioner.

On April 20, 2004, petitioner completed the submission of the pertinent

documents to prove its defenses in the protest.

On October 29, 2004, petitioner received from respondent the Final Decision
on Disputed Assessment, together with the amended assessment notices, reducing
the alleged deficiency of VAT and DST, cancelling the FWT and reiterating the EWT

Not amenable to pay the revised assessments under the Final Decision and
Amended Assessment Notices, petitioner filed a petition for review with CTA.

In his answer, respondent alleged by way of special and affirmative defenses

that the disputed assessment was made within the prescriptive period pursuant to
Sec. 222 (a), in relation to Section 248 (B) of the 1997 tax code, as amended;
under Section 105 of the same code, petitioner is liable to pay as deficiency VAT<
which resulted from the interest income it derived from inter-company loans to
affiliates, as form of financial assistance in the course of its trade and business;
petitioner is also liable to pay deficiency EWT under Section 2.57.2 (B) of revenue
regulation 2-98; under Sec. 180 of the 1997 tax code, as amended, petitioner is
liable to pay P514,881.47 DST for the loan agreements it made with its affiliates,
which were presumed to be in writing as the earned interest.

On October 18, 2007, the First Division rendered judgment in the terms
earlier set forth.
On November 9, 2007, petitioner filed a Motion for Partial Reconsideration
and on December 5, 2007,a Supplement to Motion for Partial Reconsideration,
which were both denied for lack of merit by the First Division in its Resolution dated
February 4, 2004: Hence, this Petition for Review, raising the following:


(1) Whether or Not the respondents right to assess petitioner for deficiency
VAT for the first quarter of 2000 has prescribed
(2) Whether or Not the first division erred in finding that the interest on loans
extended to affiliates is subject to 10% VAT

Held: Petitioner maintains that respondents right to assess it for VAT deficiency for
the first quarter of 2000 had prescribed, pursuant to SEC. 203 of the NIRC of 1997:
that the three year prescriptive period should be counted from April 25, 2000, the
date when petitioner filed its Monthly VAT Declaration using BIR FORM 2550M, and
not then it filed is Quarterly VAT Return on September 4, 2001; when it filed its
amended VAT Return using BIR Form 2550Q on September 4, 2001, the figures
reported on the previously filed Monthly VAT Return are just the same, this, there is
no substantial amendment; the three year prescriptive period should be reckoned
from April 25, 2000; since the formal assessment notice for VAT deficiency covering
year 2000 was only issued on January 21, 2004, the VAT assessment made by
respondent is therefor beyond the three year period, and is thus barred by

It is clear from the provisions of the tax code that the three year prescriptive
period of the right of the government to assess the petitioner should be reckoned
from September 4, 2001, the date when petitioner filed its VAT return for the first
quarter of 2001, and not from April 25, 2000, the date when petitioner filed its VAT
return for the month of March 2000.

Accordingly, respondent had until September 4, 2004 to assess herein

petitioner. When therefore respondent issued the Formal Assessment Notice against
petitioner on January 21, 2004, clearly, it was issued within the three year
prescriptive period and therefore, is not barred by prescription.

Petitioner argues that the First Division erred in finding that the interest
income on loans extended by petitioner to its affiliates is subject to VAT; it is not a
lending investor nor a dealer in securities or a financing company; it does not lend
money to clients or customers in the ordinary course of trade or business and does
not even habitually extend loans it its affiliates.

Petitioners contention has also no merit.

Pursuant to Section 105 of the NIRC, any person who, in the course of his trade or
business, sells, barters, exchanges or leases goods or properties, or renders
services shall be liable to VAT imposed in Sec 106 or Sec 108 of the NIRC.

In the case at bench, petitioner is a domestic corporation engaged in managing,

promoting, administering or assisting in any business or activity of corporations,
partnerships, associations, individual or firm. When petitioner extended loans to its
affiliates, it provided assistance to corporations, and thus performed services
incidental to its business.

Furthermore, the loan assistance provided by petitioner to its affiliates, being

incidental to its business, is deemed a transaction in the course of trade and
business. The phrase in the course of trade and business means the regular
conduct or pursuit of a commercial or an economic activity, including transactions
incidental thereto. Incidental means depending upon or appertaining to something
else primary; something necessary appertaining to, or depending upon another,
which is termed the principal; something incidental to the main purpose.

Considering the foregoing, the court held that the income generated by petitioner
from the loans granted to its affiliates is subject to VAAT, pursuant to Sec 105, in
relation to Section 108 of the NIRC.

In addition, if the income from the main business activity is subject to VAT, the
incidental income shall also be subject to VAT, provided that there is no particular
provision applicable to the specific transaction. Considering that petitioners income
from its management services is subject to VAT, it necessarily follows then that the
interests from loan which is an incidental income, is also subject to VAT.

Petitioner further contends that it does not profit from lending to its affiliates, as
the interest charged by the bank which funded the loans was the interest passed on
to the affiliates; the loans were just an accommodation and the only reason why
petitioner charged interest on the loans was to comply with Rev. Memorandum
Order No. 63-99, and Rev Memorandum Circular 43-2003, it expressly provides
that interest income on loans is subject to VAT only if the lender qualifies as a
lending investor, dealer in securities, financial institution.

Contention of petitioner has no merit.

Pursuant to the above ruling of the SC, petitioners income from loans extended to
its affiliates is subject to VAT.

Tourist Trade and Travel Corporation VS. CIR

FACTS: Petitioner is a domestic corporation duly organized and existing under and
by virtue of the laws of the Philippines. The Articles of Incorporation of petitioner
indicate that its primary purpose is to engage and carry on the business of tourism
and travel, to undertake and promote the development of tourist attractions and
operate and maintain essential facilities for tourist and travelers like resorts, hotels,
restaurants and other tourist services; to operate ferry boats to transport tourists
and other persons in connection with or to carry out the aforementioned purpose.

In line with this purpose, petitioner leased from the City of Manila in 1971 a
parcel of land upon which a shopping complex was built now known as Harrison
Plaza. This lease contract entitled petitioner to a leasehold right over the property
for a period of 20 years.

On June 7, 1991, petitioner received two notices of assessment issued by

respondent demanding payment of alleged unpaid income and value-added taxes
for the year 1988.

On July 8, 1991, petitioner filed a letter with respondent requesting for a

reinvestigation/reconsideration of the findings made by the BIR examiners
regarding their tax liabilities. This request for reinvestigation was well within the 30
day period prescribed by law as July 7, 1991 fell on a Sunday thus it was finally
filed on the next working day which was July 8, 1991.

On April 20, 1992, petitioner received a letter from respondent denying

petitioners request for reinvestigation. The reasons for the denial for remain
disputed as both parties gave different versions of the events which led to the
rejection of the request of petitioner.

Respondent maintains that such request was denied due to petitioners

refusal to turn over several documents necessary to support the grounds for
reconsideration. Petitioner denies this and stressed that it was willing to hand over
the documents by the BIR enforcement officers had rescheduled the investigation
as it was the month of December and there was then a temporary ban on tax

From this denial, petitioner elevated its case to CTA praying for the
nullification of the aforementioned assessments.
During the hearing petitioner wrote a letter to respondent, offering to settle
this dispute by requesting that it be allowed to pay an amount equivalent to 30% of
the basic tax due.

Respondent has not taken any action with respect to this offer of compromise
made by petitioner.

Issue: Whether or not petitioner is liable for the payment of unpaid income and
value-added taxes as its tax liability for 1988.

Held: The court finds that the rental income generated from Rustans and SM for
the spaces leased by the them do not belong to petitioner. The BIR Records
submitted indicate that originally petitioner was the lessor of the space occupied by
Rustans and a lease agreement was executed on September 5, 1983 whereby
Rustans Commercial Corporation as lessee agreed to pay monthly rentals to
petitioner as lessor whereby petitioner assigned the ownership, rights, interest and
obligations over the building rented by Rustans in favor of Miltiplex marketing
Corporation (MMC). The consideration for such assignment was to enable petitioner
to pay MMC for the financial assistance extended by the latter to the former in the
construction of this particular build.

The second aspect of the assessment issued by respondent concerns the

alleged UNDECLARED RETANL INCOME of petitioner in 1988. Petitioner claims
that this amount corresponds to the 6-month rental advances and 6-month rental
deposits given by its lessees pursuant to the lease agreement and should not be
considered as income for the following reasons:

1. The advance rentals received by the petitioner as lessor are eventually

returned to the lessees on a quarterly basis over the lifetime of the lease
2. The rental deposites are kept intact during the lifetime of the said contract
and are to be returned to said lessees upon the expiration of the contract.

Petitioner presented as evidence samples of lease contracts it executed with

some of its lessees, such samples having been picked at random by the
Commissioner appointed by the Court among the many contract submitted.

A review of the evidence presented convinced the court that the assessed
undeclared rental income corresponding to the security advances and security
deposits should not be considered as income for tax purposes. By their very
nature, the amount receive by the petitioner either as security advances or
deposit is eventually returned to the lessees hence petitioner did not earn any
gain or profit therefrom.

In the instant case, the security deposits as stipulated are to be returned to the
lessees upon the expiration of the contract less whatever amount lessee may
owe lessor or what may be due as payment of unpaid bills by lessee. Likewise,
the security advances are to be rebated on a quarterly basis throughout the
lease period.

In this case, the court agreed with the petitioner that they are not the ones
directly providing for the services payment of electric, water and telephone bills
and for the janitorial services therefore they cannot be made liable for VAT.
Evidence adduced during trial that all electric, water, telephone as well as
expenses for the maintenance of common facilities and janitorial services were
all paid by the petitioner and the lessees are made to reimburse these advances
made in accordance with the lease agreements.

Section 99 of the tax code provides that Person liable any person, who in the
course of trade or business sell, barters or exchanges goods, renders services,
or engages in similar transactions and any person who imports goods shall be
subject to the VAT imposed.

It is clear from the described arrangement that petitioner does not fall under the
provision of the law. It is not the petitioner who directly supplies electricity etc.
etc., neither does it render security and janitorial services. What petitioner does
is to pay PLDT, Meralco, MWSS and similar other establishments for the services
that they render and the goods that they supply for the whole Harrison Plaza
Complex. Therefore reimbursement sought from the tentnt for advance made by
petitioner are not subject to VAT.