Lapanday vs CIR

Facts

Lapanday Foods Corporation, a domestic corporation engaged in management services, was assessed by the
(BIR) on January 21, 2004, for deficiency taxes totaling PHP 8,561,775.88 (VAT), PHP 374,749.21 (EWT), PHP
5,815,233.36 (FWT), and PHP 1,578,579.59 (DST) for the taxable year 2000. Lapanday protested the
assessments, and the BIR issued a Final Decision on Disputed Assessment (FDDA), which canceled FWT but
maintained VAT, DST, and EWT assessments with adjustments, resulting in a total liability of PHP
8,804,712.10.

Aggrieved, Lapanday filed an appeal with the Court of Tax Appeals (CTA), contesting the timeliness and basis
of the assessments. The CTA First Division partly granted the appeal, canceling the EWT and DST assessments
but sustaining the VAT assessment. The CTA cited Section 105 of the NIRC, which includes transactions
incidental to the main trade or business. Finding that Lapanday is primarily "engage[d] in the managing,
promoting, administering, or assisting in any business or activity of corporations, partnerships, association,
individual or firms,"14 the tax court held that the loans granted to the affiliates of Lapanday are transactions
incidental to the latter's business of providing assistance to its affiliates

Issue

Whether the interest income on loans extended to affiliates is subject to VAT.

Ruling

Interest on Loans as Subject to VAT

The court held that the interest income on loans extended by Lapanday to its affiliates is not subject to VAT.
The primary question is whether the loans were made “in the course of trade or business” and if they were
incidental to Lapanday’s main business activity. The court found that the loan transactions were occasional,
accommodated affiliates lacking credit lines, and were funded using Lapanday’s credit lines with no profit
motive, thus being merely passive incomes. Consequently, the loans did not constitute a commercial or
economic undertaking related to Lapanday’s management services.

The Value-Added Tax (VAT) applies to the sale of services in the course of trade or business which includes
transactions incidental thereto. It does not follow that an isolated transaction cannot be an incidental
transaction for purposes of VAT liability.3 However, it must be clearly established that the transaction in
question must be related or connected with the conduct of the main business activity which is subject to the
VAT.

*The basic provision for the VAT taxability of transactions is found in Sec. 105 of the Tax Code. It provides:

SEC. 105. Persons Liable. – Any person who, in the course of trade or business, sells, barters, exchanges,
leases goods or properties, renders services, and any person who imports goods shall be subject to the
value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of
sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.

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 non-stock, non-profit private organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to members or their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by non-resident foreign persons shall be considered as being rendered in the course of trade or
business.

*The records support Lapanday's submission that it granted loans to affiliates only on few occasions. The
loans were granted only to accommodate affiliates which did not have existing credit lines with banks.
Accordingly, Lapanday used its credit line to facilitate the loan to its affiliates.

CIR vs BW Shipping

Facts

Respondent is a corporation duly organized and existing under the laws of the Philippines engaged in the
general business of shipping including manning and crewing of vessels, as well as the carriage of passengers,
freight, mail, livestock, and other lawful merchandise.

respondent filed an administrative claim for refund or issuance of TCC of its unutilized input VAT for TY 2014.
Respondent alleged that for TY 2014, it rendered manning services to shipping companies located and doing
business outside the Philippines for which it was paid manning fees in foreign currency that were subjected
to 0% VAT. Respondent opined that since their sales are purely zero-rated, the input taxes all related to zero-
rated accounts. Accordingly, for said TY 2014, respondent generated purely zero-rated receipts on the
aggregate amount of PHP 129,866,272.96 and paid input VAT attributable to said sales in the total amount of
PHP 7,346,268.45. These input taxes, according to respondent, were not utilized in the same quarter and
were likewise not used against their output taxes in the subsequent periods.

BIR denied respondent's claim.8 This prompted respondent to file a Petition for Review before the CTA.

CTA First Division partially granted respondent's Petition and ordered the refund or issuance of TCC in their
favor representing its unutilized input VAT attributable to zero-rated sales for the four quarters of TY 2014.

The CTA Division held that respondents have complied with all requisites under Section 108 (8)(2) in relation
to Sections 110(B) and 112(A) and (C) of National Internal Revenue Code of 1997 (NIRC) to be entitled to a
refund of excess input VAT attributable to its zero-rated sales,13 considering that:

First, respondent is registered with the BIR as a VAT taxpayer

Second, the services rendered by respondent are VAT-zero-rated.

Fourth and fifth, respondent had no output tax liability for the four quarters of the TY 2014 against which the
subject input VAT claim may be applied or credited. Although respondent carried over the claimed input VAT
in its succeeding quarterly VAT returns for the TY 2015, the same remained unutilized until it was deducted
as "VAT Refund/TCC Claimed" in its Quarterly VAT Return for the 1st Quarter of the TY 2016 thus, preventing
the carry-over or application of the claimed input VAT in the next TYs.

Sixth, all administrative claims including the submission of required documents were timely filed within the
two-year period after the close of the taxable quarter for all quarters of the TY 2014 on March 30, 2016.

Issue

whether the CTA En Banc correctly affirmed the CTA Division's order to refund or issue a TCC for respondent's
excess/unutilized input VAT for the four quarters of TY 2014

Ruling

In order for respondent to qualify for VAT zero-rating, the following requisites under Section 108 (B) (2) of the
NIRC, as amended by RA 9337 must be met: "first, the services rendered should be other than 'processing,
manufacturing or repacking of goods;' second, the services are performed in the Philippines; third, the
service-recipient is (a) a person engaged in business conducted outside the Philippines; or (b) a non-
resident person not engaged in a business which is outside the Philippines when the services are
performed; and,fourth the services are paid for in acceptable foreign currency inwardly remitted and
accounted for in conformity with BSP rules and regulations.

The CIR's contention is anchored on the third requisite alleging that although respondent was able to
establish that that the shipping companies are foreign entities, an examination of its Manning
Agreements/Purchasing & Infrastructure Support Agreements would reveal that said recipients are
performing acts that imply a continuity of business dealings or arrangements in the Philippines. This is
further exemplified by the provision in said agreements that designates respondent as the agent and the
shipping companies as the principal. According to the CIR, while the manning services are not directly related
to the main business of these companies, which is the shipping of goods, said services are incidental to and
in progressive prosecution of commercial gain or for the purpose and object of the shipping companies; it
would not be able to operate without said services. Accordingly, these shipping companies may be
considered as doing business in the Philippines.

*the articles of association/certificates of incorporation stating that these [clients] are registered to
operate in their respective home countries, outside the Philippines are prima facie evidence that their
clients are not engaged in trade or business in the Philippines."

*Based on the foregoing, the Court holds that the CIR failed to establish that the shipping companies are
doing business in the Philippines.

First, there was no showing that respondent, as representative/agent of the shipping companies, the
principal are operating under the full control of the latter. On the contrary, it appears that beyond providing
recruitment instructions with respect to the number of complements and categories or rating of seaman for
a particular vessel, scale of remuneration and approving the dismissal or transfer of a seafarer, the shipping
companies have no command over respondent on the operation of the latter's business even in the conduct
of its recruitment process.

Second, the hiring of the crew members in the Manning Agreements/Purchasing and Infrastructure Support
Agreements engaged by the shipping companies are not considered a continuity of its commercial dealings
nor are these in pursuit of commercial gain.