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Updated 21st February 2025
Commissioner of Internal Revenue vs. Michel J. Lhuillier Pawnshop, Inc
The Supreme Court ruled that pawnshops are not classified as “lending investors” under the National Internal Revenue Code (NIRC) and thus not subject to a 5% percentage tax on gross income. The Bureau of Internal Revenue’s (BIR) Revenue Memorandum Order (RMO) No. 15-91 and Revenue Memorandum Circular (RMC) No. 43-91 imposing the tax were declared invalid.

Primary Holding

Pawnshops are excluded from the definition of “lending investors” under Section 116 of the NIRC, rendering BIR’s assessment for deficiency percentage tax void.

Background

The BIR sought to impose a 5% lending investor’s tax on pawnshops through administrative issuances (RMO No. 15-91 and RMC No. 43-91). Michel J. Lhuillier Pawnshop challenged the assessment, arguing pawnshops were distinct from lending investors and the BIR overstepped its rulemaking authority.

History

  • 1997: BIR issued Assessment Notice No. 81-PT-13-94-97-9-118 against Lhuillier.

  • 1997–1998: Lhuillier filed protests, elevated the case to the Court of Tax Appeals (CTA) after inaction.

  • 2000: CTA canceled the assessment and invalidated the BIR issuances.

  • 2001: Court of Appeals affirmed the CTA decision.

  • 2003: Supreme Court upheld the lower courts’ rulings.

Facts

  • 1. The BIR reclassified pawnshops as “lending investors” in 1991, subjecting them to a 5% tax under Section 116 of the NIRC.
  • 2. Lhuillier received a ₱3.36 million deficiency tax assessment for 1994.
  • 3. The CTA and Court of Appeals ruled the BIR’s interpretation exceeded statutory authority.

Arguments of the Petitioners

  • 1. Pawnshops fall under the legal definition of “lending investors” (Section 157(u) of the NIRC).
  • 2. RMO No. 15-91 and RMC No. 43-91 validly implemented tax laws.
  • 3. Cited Commissioner of Internal Revenue v. Agencia Exquisite of Bohol, Inc. (a Court of Appeals case supporting the tax).

Arguments of the Respondents

  • 1. Pawnshops fall under the legal definition of “lending investors” (Section 157(u) of the NIRC).
  • 2. RMO No. 15-91 and RMC No. 43-91 validly implemented tax laws.
  • 3. Cited Commissioner of Internal Revenue v. Agencia Exquisite of Bohol, Inc. (a Court of Appeals case supporting the tax).

Issues

  • 1. Are pawnshops “lending investors” under Section 116 of the NIRC?
  • 2. Are RMO No. 15-91 and RMC No. 43-91 valid administrative rules?
  • 3. Was publication required for the BIR issuances?

Ruling

  • 1. Statutory Interpretation: Pawnshops and lending investors were treated separately in tax provisions (e.g., fixed annual tax vs. percentage tax).
  • 2. Legislative Intent: Congress excluded pawnshops from Section 116 (expressio unius est exclusio alterius).
  • 3. Invalidity of BIR Issuances: RMO/RMC imposed new taxes without statutory basis and lacked publication.
  • 4. Repeal of Section 116: The 1994 E-VAT Law (RA 7716) repealed the provision, voiding the assessment.

Doctrines

  • 1. Expressio Unius: Exclusion of pawnshops from Section 116 implies legislative intent to exempt them.
  • 2. Administrative Rules: Must align with enabling statutes; cannot create new obligations.

Key Excerpts

  • 1. “[A]dministrative issuances must not override, supplant, or modify the law, but must remain consistent with the law they intend to carry out.”
  • 2. “Only Congress can repeal or amend the law.”

Precedents Cited

  • 1. Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary: Discussed requirements for valid administrative rules.
  • 2. Commissioner of Internal Revenue v. Court of Appeals: Emphasized limits on BIR’s rulemaking power.

Statutory and Constitutional Provisions

  • 1. NIRC of 1977/1986: Sections 116, 157(u), 192(3)(dd), (ff).
  • 2. PD 114 (Pawnshop Regulation Act): Defined pawnshops.
  • 3. RA 7716 (E-VAT Law): Repealed Section 116.