G.R. No. 22619 - National Coal Co. vs. Collector of Internal Revenue

Case Summary (G.R. No. 22619)

Petitioner and Respondents

Petitioner: Commissioner of Internal Revenue (CIR)
Respondents: Private consortium (Magsaysay Lines, Inc.; Baliwag Navigation, Inc.; FIM Limited)

Key Dates

• June 3, 1988 – Winning bid by private respondents for NMC shares and five vessels.
• September 28, 1988 – Contract of Sale executed between NDC and private respondents.
• December 14, 1988 – BIR issues VAT Ruling No. 568-88 subjecting sale to 10% VAT.
• March 16, 1989 – NDC draws on Letter of Credit; pays P15,120,000 as VAT.
• April 10 & July 14, 1989 – Private respondents file petition for refund with CTA.
• April 27, 1992 – CTA grants refund, ruling sale as an isolated transaction not subject to VAT.
• March 11, 1997 & February 5, 2001 – CA decisions; initially reverses CTA, then reaffirms CTA upon reconsideration.
• July 28, 2006 – SC renders final decision.

Applicable Law

• 1987 Philippine Constitution (post-1990 decision).
• National Internal Revenue Code of 1986 (Tax Code), especially Sections 99 and 100 on VAT.
• Revenue Regulation No. 5-87 implementing VAT provisions.

Factual Background

Under a government privatization program, NDC offered for public bidding its shares in the National Marine Corporation (NMC) along with five 3,700 DWT “Tween-Decker” vessels. The winning bid totalling ₱168 million required payment of a 10% VAT “if any.” A Letter of Credit served as security for the VAT. BIR rulings declared the sale subject to VAT; NDC paid ₱15.12 million under protest.

Procedural History

Private respondents sought refund before the CTA, which ruled the transaction an “isolated sale” outside the course of NDC’s business and therefore VAT-exempt. The CA initially reversed this decision, deeming the sale a “deemed sale” under R.R. No. 5-87’s “change of ownership” provision. Upon reconsideration, the CA reinstated the CTA’s rationale. The CIR elevated the matter to the SC.

Issue

Whether NDC’s sale of vessels, made outside its ordinary course of business, is subject to VAT under the Tax Code and implementing regulations.

VAT Principles and Course-of-Business Requirement

• VAT is ultimately a tax on consumption, passing through each transaction until borne by the end consumer.
• Section 99 of the Tax Code imposes VAT only on sales “in the course of trade or business.”
• An “isolated transaction” or one not repeated with regularity falls outside this scope, precluding VAT liability.

“Deemed Sale” Provisions Are Inapplicable

• Section 100(b) and R.R. No. 5-87 enumerate transactions “deemed sale,” including “change of ownership” incident to “retirement or cessation of business.”
• Such provisions presuppose that the transaction occurs “in the course of business” and serve as classification statutes, not exemptions.
• Given that NDC’s primary activity was leasing and it did not regularly engage in asset sales, the privatization sale was involuntary and irregular.

Supreme Court