Commissioner of Internal Revenue vs. Michel J. Lhuillier Pawnshop, Inc

Pawnshops are not "lending investors" subject to the 5% percentage tax under Section 116 of the National Internal Revenue Code of 1977, as amended. Administrative issuances that substantially increase tax burdens constitute legislative rules requiring prior publication and hearing to be valid, and cannot modify or amend the law.

The case involves the BIR's attempt to impose a 5% percentage tax on pawnshops through administrative issuances (RMO No. 15-91 and RMC No. 43-91) by reclassifying them as lending investors. Prior to these issuances, the BIR had consistently ruled that pawnshops were not lending investors and were subject only to fixed annual taxes, not percentage taxes on gross income.

• The BIR issued Assessment Notice No. 81-PT-13-94-97-9-118 against Lhuillier on September 11, 1997 for deficiency percentage tax for 1994 amounting to P3,360,335.11
• Lhuillier filed an administrative protest with the Revenue Regional Director on October 3, 1997
• Deputy BIR Commissioner issued Warrant of Distraint and/or Levy No. 81-043-98 on October 12, 1998
• Lhuillier elevated the protest to the CIR on March 3, 1998; the CIR failed to act
• Lhuillier filed a "Notice and Memorandum on Appeal" with the CTA on November 11, 1998 (CTA Case No. 5690)
• The CIR filed a motion to dismiss on November 19, 1998, which the CTA denied on June 30, 1999; the CTA also granted a writ of preliminary injunction
• The CTA rendered decision on December 13, 2000 cancelling the assessment and declaring RMO No. 15-91 and RMC No. 43-91 null and void
• The CIR filed a petition for review with the CA
• The CA affirmed the CTA decision on November 20, 2001 (CA-G.R. SP No. 62463)
• The CIR filed a petition for review on certiorari with the SC

• On March 11, 1991, the CIR issued RMO No. 15-91 imposing a 5% lending investor's tax on pawnshops, claiming their principal activity is lending money at interest under Section 3 of P.D. No. 114
• On May 27, 1991, the CIR issued RMC No. 43-91 clarifying that pawnshops become liable for the tax beginning January 1, 1991, and revoking prior BIR rulings (BIR Ruling No. 6-90, VAT Ruling Nos. 22-90 and 67-90) that had exempted pawnshops from percentage tax
• From April 1982 to December 1990, the CIR consistently ruled that pawnshops were not lending investors; pawnshops paid only an annual fixed tax of P1,000 while lending investors paid the 5% percentage tax on gross income plus fixed taxes
• In 1994, Congress introduced House Bill No. 11197 seeking to amend Section 116 to expressly include "owners of pawnshops" as subject to the 5% percentage tax, but this provision was not adopted in the final version that became R.A. No. 7716 (E-VAT Law)
• R.A. No. 7716 repealed Section 116 of the NIRC of 1977, effective May 27, 1994
• The NIRC of 1977 (as renumbered by E.O. No. 273) and the NIRC of 1986 both subjected pawnshops and lending investors to different fixed tax treatments under Sections 192(3)(dd)/(ff) and 161(2)(dd)/(ff) respectively

• Section 116 of the NIRC of 1977 subjects lending investors to 5% percentage tax on gross income, and the definition of lending investors in Section 157(u) of the NIRC of 1986 ("all persons who make a practice of lending money for themselves or others at interest") is broad enough to include pawnshops
• Section 3 of P.D. No. 114 defines pawnshops as engaged in the business of lending money, making them akin to lending investors
• RMO No. 15-91 and RMC No. 43-91 are valid interpretative rules implementing Section 116 and do not require publication
• Cited Commissioner of Internal Revenue vs. Agencia Exquisite of Bohol, Inc. (CA-G.R. SP No. 59282) where the CA upheld the validity of subjecting pawnshops to the 5% tax

• Neither the Tax Code nor the VAT Law expressly imposes 5% percentage tax on pawnshops; pawnshops and lending investors have historically been subjected to different tax treatments (pawnshops paid only P1,000 fixed tax; lending investors paid 5% percentage tax plus fixed taxes)
• RMO No. 15-91 and RMC No. 43-91 are not implementing rules but new tax measures requiring legislation by Congress; they constitute taxation by implication which is proscribed
• The issuances were never published in the Official Gazette or newspaper of general circulation as required for legislative rules
• Expressio unius est exclusio alterius — the specific enumeration of "dealers in securities" and "lending investors" in Section 116 excludes pawnshops by implication
• Revenue laws imposing special burdens cannot be extended by implication beyond the clear import of the language used
• Pawnshops are strictly regulated by the Central Bank under P.D. No. 114, while lending investors have no special governing law, evidencing distinct legislative treatment

• Procedural Issues: N/A
• Substantive Issues:
  • Whether pawnshops are "lending investors" subject to the 5% percentage tax under Section 116 of the NIRC of 1977
  • Whether RMO No. 15-91 and RMC No. 43-91 are valid administrative issuances or legislative rules requiring publication and hearing
  • Whether Section 116 of the NIRC of 1977 was still in force at the time of the assessment

• Procedural: N/A
• Substantive:
  • Pawnshops are not lending investors. The SC ruled negatively. The legislative intent to treat pawnshops differently from lending investors is evidenced by: (1) distinct fixed tax treatments under Sections 192(3)(dd)/(ff) of the NIRC of 1977 and Section 161(2)(dd)/(ff) of the NIRC of 1986; (2) the failed attempt in House Bill No. 11197 to expressly include pawnshops in Section 116, which demonstrates they were not previously covered; and (3) the maxim expressio unius est exclusio alterius — the specific mention of lending investors excludes pawnshops.
  • RMO No. 15-91 and RMC No. 43-91 are invalid legislative rules. The SC held these were not mere interpretative rules but legislative rules creating new tax burdens. As such, they required prior notice, hearing, and publication to be valid. The SC emphasized that administrative agencies cannot override, supplant, or modify the law; only Congress can repeal or amend the law.
  • Section 116 was repealed by R.A. No. 7716. The SC noted that R.A. No. 7716 (E-VAT Law) repealed Section 116 of the NIRC of 1977 effective May 27, 1994. Consequently, the assessment for 1994 (from May 27 onward) had no legal basis regardless of the other issues.

• Expressio unius est exclusio alterius — The mention of specific persons or things (dealers in securities and lending investors) implies the exclusion of all others (pawnshops) not mentioned. The SC applied this to determine that Congress did not intend to include pawnshops within the coverage of Section 116.
• Legislative vs. Interpretative Rules — Legislative rules (subordinate legislation that substantially increases the burden of those governed) require prior publication and hearing; interpretative rules (mere guidelines to the law) do not. The SC ruled that RMO No. 15-91 and RMC No. 43-91 were legislative rules because they created new tax liabilities where none existed before.
• Non-Delegation of Legislative Power — Administrative agencies, including the CIR, cannot issue rulings that override, supplant, or modify the law. Only Congress can repeal or amend the law.
• Strict Construction of Revenue Laws — Revenue laws imposing special burdens upon taxpayers cannot be extended by implication beyond the clear import of the language used.

• "Administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out. Only Congress can repeal or amend the law."
• "Under the maxim expressio unius est exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned."
• "When, on the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law."
• "There is only one Supreme Court from whose decisions all other courts should take their bearings."

• Commissioner of Internal Revenue vs. Court of Appeals (G.R. No. 108358) — Cited for the principle that administrative issuances must not override the law they seek to implement.
• Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance Secretary — Cited for the distinction between legislative and interpretative rules and the requirement of publication and hearing for the former.
• Commissioner of Internal Revenue vs. Agencia Exquisite of Bohol, Inc. (CA-G.R. SP No. 59282) — Distinguished; the SC noted that as a CA decision, it is not binding on the SC.
• Vera vs. Fernandez and Republic vs. Estenzo — Cited for the application of the maxim expressio unius est exclusio alterius.

• Section 116 of the NIRC of 1977 (as amended by E.O. No. 273) — Percentage tax on dealers in securities and lending investors (5% on gross income).
• Section 157(u) of the NIRC of 1986 — Definition of lending investors.
• Section 3 of P.D. No. 114 — Definition of pawnshops and their regulation.
• Sections 192(3)(dd) and (ff) of the NIRC of 1977 and Sections 161(2)(dd) and (ff) of the NIRC of 1986 — Fixed taxes on lending investors and pawnshops, showing distinct treatment.
• Section 245 of the NIRC of 1977 — Power of the CIR to make rulings and opinions.
• R.A. No. 7716 (E-VAT Law), Section 20 — Repealed Section 116 of the NIRC of 1977.
• Administrative Code of 1987 — Requirements for public participation and publication in rule-making.

• N/A (Vitug, Ynarez-Santiago, Carpio, and Azcuna, JJ., concurred with the majority without separate opinions)