Commissioner of Internal Revenue, petitioner
CA and Commonwealth Management and Services Corporation, respondents
FACTS:
1. Commonwealth Management and Services Corp. (COMASERCO) is a corporation duly organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife), organized by the latter to perform collection, consultative and other technical services, including functioning as an internal auditor, of Philamlife and its other affiliates.
2. On January 24, 1992, the BIR issued an assessment to Commonwealth Management and Services Corp. (COMASERCO) for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988
3. On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO demanding payment of the deficiency VAT.
4. On September 29,1992, COMASERCO filed with the CTA a petition for review contesting the Commissioner's assessment. Its arguments are as follows:
- The services it rendered to Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis;
- That it was not engaged in the business of providing services to Philamlife and its affiliates and that it was established to ensure operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of services; and
- That it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988. Since it was not engaged in business, it was not liable to pay VAT.
CTA: Denied COMASERCO's petition. Affirmed the Commissioner's deficiency VAT assessment for the year 1988.
CA: Reversed CTA ruling. Cancelled the assessment for deficiency VAT for the year 1988. The basis for the CA's ruling was a prior ruling it made in another case involving COMASERCO, where it was held that COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates and as such was not engaged in business of providing services to Philamlife and its affiliates.
Hence, the instant petition for review on certiorari by the Commissioner.
ISSUE:
Whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.
HELD:
Petition granted. Reversed CA ruling. Reinstated CTA ruling. COMASERCO ordered to pay deficiency VAT as per the assessment issued by the Commissioner for the taxable year 1988.
1. Who are the persons liable for VAT?
"Section 99, NIRC. 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.""
2. What does "in the course of trade or business" mean?
COMASERCO: The term "in the course of trade or business" requires that the "business" is carried on with a view to profit or livelihood. In other words, the activities of the entity must be profit-oriented.
SC: Under Sec. 105 (Persons Liable) of R.A. No. 7716, or the Expanded VAT Law (EVAT), the phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity.
This definition applies to all transactions even to those made prior to the enactment of the EVAT Law, which merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services.
3. Are non-stock, nonprofit organizations or government entities (such as COMASERCO) liable to pay VAT for the sale of goods and services?
COMASERCO: No, profit motive is material in ascertaining who to tax for purposes of determining liability for VAT.
SC: Yes, even a non-stock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods or services.
It is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT.
This contention finds support in BIR Ruling No. 010-98 issued by the Commissioner on February 5, 1998, which provides that a domestic corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any intention of realizing profit, any income or profit generated by the entity in the conduct of its activities, was subject to income tax.
4. Is COMASERCO liable to pay VAT?
COMASERCO: Because COMASERCO is not motivated by profit, as defined by its primary purpose in the articles of incorporation, stating that it is operating "only on reimbursement-of-cost basis, without any profit," it couldn't be said that it is performing acts in the course of trade or business. Hence, it is not liable for the payment of VAT.
SC: The services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. The performance of all kinds of services for others for a fee, remuneration or consideration is considered as sale of services subject to VAT. (See items 1-3 in ratio.)
5. Can the CA's ruling in a prior case involving COMASERCO be made applicable in the instant case?
SC: No. The issue in the first case (i.e., whether COMASERCO is engaged in business to determine liability for the payment of fixed and percentage taxes), is different from the present case, which involves COMASERCO's liability for VAT.