Cebu Rosver Pawnshop, Inc. vs. Commissioner of Infernal Revenue

DECISION

This is a Petition for Review filed by the Petitioner on August 18, 2000 seeking to set aside the ruling of the Regional Director of the Bureau of Internal Revenue. Revenue Region No. 13. Central Visayas, Ccbu City vvhich sustained the assessment in the total amount PG40,313.42 issued by the said regional onice for alleged Value ;\ddec.l Tax deficiency lor taxable year 1996.

The f"acts or the case as jointly stipulated by the parties arc summarized as lo llows: Petitioner is a corporation duly organized and existing under and by virtue of the laws or the Philippines with main oflicc at 4 111 Don CJOITLS-Lacson Bldg., Colon St.. Cebu City. Petitioner corporation operates Ros-Vcr Pawnshops. On April 14, 1998, Audit Notice No. OCN 2ANOOOOOO 164 was issued by the Respondent to his Revenue Oniccrs. Elizabeth Concha and Lotie Blando for the purpose of conducting an examination of the books or account and other records of the Petitioner covering taxable period 1996.

CTA CASE NO. 6 154

As a result or the said examination, Pcti tioncr con formed and was alleged! y made to execute an Agreement form. On the basis of this Agreement form, Petitioner allegedly paid a total amount of P23,4SS.94, broken down as f'ollows: a) b)

Deficiency Income Tax

Defi ciency Registration Fcc

TOTAL

P1 9.064. 18 p 4,414.76 J_>_2_:2_,1JUL 94 Subsequently, on June 2 1, 1999 the Respondent issued to Petitioner a preliminary assessment notice dated May 05, 1999 informing the latter or its alleged Deficiency Percentage Tax in the amount or P208A67.50.

On March I 0, 2000, Petitioner received a copy of a Post Reporting Notice issued by the Respondent info rming the Petitioner or its alleged de fi ciency value added tax in the amount of P627 .350.02, inclusive or surcharge, interest and penalty. On March 24, 2000. Petitioner filed its letter protest to the aJo resaid Post Reporting Assessment.

On April IS, 2000, Respondent issued another Preliminary Assessment Notice assessing Petitioner or alleged dcticiency value added taxes lor the year 1996 in the total amount of P632,929.22.

Finally, on May 30, 2000. an Assessment Notice was received by the Petitioner informing it of its alleged value added tax liabi lity in the amount of P640,3 13.42, inclusive or surcharge, interest and penalty.

On June 6. 2000, Petitioner filed its letter protest with the Respondent incorporating and bringing to the attention of' the Regional Director the March 20, 2000 protest to the Post Reporting Notice dated March 9. 2000.

CTA CASE NO. 6 154

From the denial of the Petitioner" s req uest fo r reconsideration of its assessed 1996 VAT liability, Petitioner f~ l e d the instant Peti tion for Review with this Court on August

18. 2000. In its r'Jetition fo r Review, Petitioner alleged in the main that there is no provision in the Revised Internal Revenue Code nor in the successive amendatory laws which include pawnshops as among those liable to pay value added tax. Thus, according to the Petitioner there is no valid and legal basis for the Respondent to assess and collect the I 0% value added tax from p(lwnshops and/or pawnshop operators. Moreover, Petitioner asseverates that Revenue Memorandum Order No. 15-9 1 and Revenue Memorandum Circular No. 43-91 arc null and void fo r expanding the provisions of the Tax Code when they include pawnshops as among those that arc subject to value- added tax.

The Respondent. in his Answer filed on September 26. 2000, interposed the fo llowing Special and Arfirmativc Defenses, thus: "8.

Under Section I 02 (a) of the Tax Code, as amended by R.A. No. 77 16. the sale of services rendered by lending investors ancl services similar thereto is subject to I 0% VAT on gross receipts derived fro m said sale.

Section

4. 102- 1 of Revenue Regulations No. 7-95 defines a "lending investor" as including "all persons, other than banks, non-bank financial intermed iaries, finance companies and other financial intermediaries not per!orming quasi-banking functions, who make a practice of lendi ng money Jor them sci ves or others at interest." Since the services of pawnshops arc similar to those of lending investors. the sale of said services is subject to I 0% VAT.

9.

The assessment was issued 111 accordance with law and regulations.

Dt::C ISION-

CTJ\ CASE NO. 6 154

PAGE '-I

10.

In "Commissioner of Internal Revenue v. Antonio Tuason, Inc.",. 173 SCRA 397 ( 1989) the Supreme Court declared,

VIZ:

"All presumptions arc 111 favor of the correctness of the assessment made by the

Commissioner

of lntemal Revenue.

and the taxpayer must prove the contrary.'' 11.

In ''Molina vs. RafTcrty." 3 7 Phil. 546 (February I, 19 18), the Supreme Court anirmcd the decision in Farrington v. Tennessee, 95 US 679. 686 ( 1877). which is quoted hereunder, viz: "When exemption from taxation is claimed, it must be shown indubitably to exist. The presumption is always against any surrender of the taxing power." 12.

The Court of Appeals' ruling in "Commissioner of Internal Revenue v. I Ion. Andres Reyes. et al.." : A-G. R. SJ>. No. 28824, which declares that RMO No. 15-91 and RMC No. 43-9 I arc null and void fo r being a "taxation by implication," is still under appeal before the Supreme Court (G R No. 11 3459). As such, said ruling is not yet final and executory.

Clearly, the questioned Revenue Mcmorancl um C i rcular/Ordcr arc still in full fo rce and cfTcct. 13.

Section 2 18 of the 1997 National Internal Revenue Code provides, viz:

"Sec. 218.

Injunction not Ava ilable to Restrain Collection. - No court shall have the authority to grant an injunction to restrain the collection of any internal revenue tax, fCc or charge imposed by this Code."

14.

The Supreme Court in "Obillos Jr. vs. Commissioner of Internal Revenue," 139 SCRA 44 1, ruled that:

"Taxes being the chief source of revenue fo r the government to keep it running must be paid immediately and without delay."

(Collector of

Internal Revenue vs. Yuseco, 3 SCRA 313) 15.

Section II of Republic Act No. 11 25 provides, viz:

DEC ISION -

CT/\ C/\ SE NO. G I 54

PAGE 5

"Sec. II . Who may appeal; ciTcct or appeal. - XXX XXX XXX No appeal rrom the decision or the Commissioner or Internal Revenue XXX shall suspend the paymcnL levy, distraint. and/or sale or any property or the taxpayer lor the s ati s l ~t e ti o n or hi s tax liability as provided by existing law. xxx" On April 10.2001 , after the parties have submitted their respective memorandum. this case was considered submitted lo r decision. The vortex ol the controversy lies on whether or not pawnshops arc subject to the payment or the I 0% value added tax.

We rule in the negative.

!\ carci'ul reading or the disputed provisions or the Tax Code becomes necessary fur the proper disposition or the issues, thus:

"Sec. 157. \Vo n.ls and Phrases defined. - x x x

(u) "Lending investor " includes all persons 1rho make a practice of lending moneyf hr themselves or others at interest. Sec. 16 1. Fixed Taxes. - x x x (3) Other fi xed taxes. - x x x (dd) Lending im ·c:slors - I . in chartered citic:s w1djirst class nwnicipa/ities. one thousand pesos:

2.

in second and third class municipalities, .five hum /red pesos;

3. in .fourth and f!fih class municipalities and nwnicipa/ districts. !1 110 hundred .fijiy pesos:

Provided, /'hat lending investors who do business as such in more than one province shall pay a tux o{one thousand pesos.

X X X

X X X

XXX

CT/\ CASE NO. 6 154

Sec. 175.

Percentage tax on <.lealers in securities, len<.ling investo1·s. - Dealers in securities shell/ pay o tax equivalent to six (6%) per c:enl q( their gross inc:ol/le.

Lending im•eslors shall pay o lox equivalent to j ive (5%) per cent of their gross incol/le. (Formerly Section 11 6.)

Pertinent provtstons of Presidential Decree I 14 (Pawnshop Regulatory Act) arc likewise cited, to wit:

Sec. 3. Definitions. - As used in this decree, unless the context otherwise requires, the lo llowing terms shall have the lo llowing meanings: "Pawnshop" shall relCr to a person or entity engaged in the business of lending money on personal properly delivered as security lo r loans and shall be synonymous and may be used interchangeably, with pawnbroker or pawnbrokcragc.

XXX

XXX

XXX

Sec. I 0.

Roles ul interest. - No pawnshop shall directly or indirectly stipulate, charge, demand. take or receive any higher rate or greater sum or value for any loan or fo rbearance than the rate allowed by the Usury Law fo r such transactions. x x x" The alo requoted provisions would apparently bolster the theory of Respondent that pawnshops are indeed lending investors because the principal acti vity of the pawnshop is lending money at interest. This interpretation by the Respondent was oiTicially declared in the now disputed RMO 15-91 and RM O 43-9 1. both hereinbelow quoted, thus: RMO No. 15-9 1, March 11 , 199 1 "A restudy of P.O. 114 shows that the principal actlVlty of pawnshops is lending money at interest and incidentally accepting a pawn of personal properties deli vered by the pawner to the pawnee as security lo r the loan. Clearl y, this makes pavvnshop business akin to lending investor's business acti vity which is broad enough to encompass the business of lending money at interest by any person whether natural or juridical. Such being the case, pawnshops shall be subject to the 5% lendi ng investor's Lax based on their gross income pursuant to Section 11 6 of the Tax Code, as amended."

CT A C/\SE NO. 6 1 54

RMC No. 43-91, May 27,1991 "This Circular subjects to the 5% lending investor's tax the gross income of pawnshops pursuant to Section 11 6 of the Tax Code, and it thus revokes 131R Ruling Nos. 6-90, and VAT Ruling Nos. 22-90 and 67-90. In order to have a uniform cut-off date, avoid unfairness on the part of taxpa),crs if they arc required to pay the tax on past transactions, and so as to give meaning to the express provisions of Section 246 of the Tax Code, pawnshop owners or operators shall become liable to the lending investors tax on their gross income beginning January I, 19S I. Since the deadline l<.n the filing of percentage tax return (131R Form No. 2529A-O) and the payment of the tax on lending investors covering the first calendar quarter of 1991 has already lapsed taxpayers arc given up to June 30, 199 1 withi n which to pay the said tax without penalty. If the tax is paid al'tcr June 30, 1991, the corresponding penalties shall be assessed and computed from A pri I 2 I , I 99 1 .

Since pawnshops arc considered as lending investors clTccti vc .January I, 1991, they also become subject to documentary stamp taxes prescribed in title VII of the Tax Code. BIR Ruling No. 325-88 dated July 13, 1988 is hereby revoked."

Both RMO No. 15-9 1 and RMC No. 43-91 had the cf!Cct of revoking 131R Ruling _Nos. 6-90 and V !\ T Ruling Nos. 22-90 and 67-90 which exempted pawnshops !'rom the 5% lending investor's tax.

We do not however agree wi th the Respondent and lind that pawnshops arc not J subject to the 5% lending investor's tax and this has been well-settled by this Court in the case of Agcncia Exquisite of 13ohol, CTA Case No. 5990 promulgated on March 14, 2001 and Trustworthy Pawnshop, Inc. vs. Collector of Internal Revenue, CTA Case No. 5691 promulgated on March 7, 2000.

In CTA Case No. 5691 entitled Trustwo rthy Pawnshop, Inc. vs. Collector of Internal Revenue promulgated on March 7, 2000, thi~ Court ruled: "If we go by the contention that pawnshops are lend ing investors, then Congress would not have been mi staken in treating the two separately under paragraphs (dd) and (//)of Section 16 1 of the Tax Code, as amended,

DLC ISION-

CT /\ CA SE NO. 6 154

P/\GE 8

supra. Logic simply dictates that if by prior definition under Section 157

(u) of said Code pawnshops and lending investors arc of the same class, then there is no rational basis for differentiating them under one head ing later. --except for the f~1c t that they arc dissimilar as tax subjects. Further analyzing said Section 16 1, supr .,, it appears that lending investo rs were imposed a graduated type of fixed taxes depending on the class of the city or municipality involved while pawnshops were differently levied a flat amount of tax. This particular observation bolster Our position that pawnshops arc not similarly situated as lending investors.

Congress

would not have intended otherwise, because the act of segregating and imposing upon them unequal amount of taxes would transgress the rundamcntal rule on taxation on uni i'ormity or eq uali ty enshrined under par. I, Section 28 of Article VI or our Constitution. The rule requires that all subject or objects of taxation. similarly situated, arc to be treated alike or put on equal footing both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phi. 371 ).

It has also been interpreted to mean that all taxable articles or ki1~d s of property of the same class shall be taxed at the same rate (City of llaguio vs. de Leon, 25 SCRA 938). Verily, Congress is presumed to have acted in full knowledge of this particular constitutional limitation when it classified pawnshops apart from lending investors." The Court of i\ppcals also had the occasion to rule on the validity or RMO No. I 5- 91 and RMC No. 43-91 in the case of Commissioner of lntcmal Revenue vs. Hon. ' Andres B. Reyes, Jt·., ct. al., CA-GR SP No. 28824 when it ruled, thus: "xxx.

Revenue Circular Nos.

I 5-91 and 43-9 1 arc nut implementing rules but arc new and additional measures which onl y congress is empowered to impose. Section 245 of the Tax Code has limited OJ confined petitioner's power to issuing rules and regulations to implement or carry into effect the provision of the Code in the enforcement of taxes therein, and petitioner cannot impose additional taxes not provided therein. Under the Constitution, the power to tax is solely vested in Congress. In issuing subject Revenue Circulars imposing new taxes against pawnshops, petitioner arrogated unto himself legislative powers, with grave abuse of discretion and in excess orjurisdiction." We do not sec any valid or cogent reason to depart fro m the wisdom of the aforequotcd decision or the Court of Appeals inso l~11· as it declares the invalidity of RMO No. I 5-9 1 and RM C No. 43-9 1 in the li ght of clear constitutional provisions. And since CTA CASE NO. 6 154 the deficiency VAT assessment issued against the Petitioner is hinged on Respondent's ...

conclusion that the former is a lending investor thus also subject to VAT, this Court's contrary ruling as discussed above, efTcctively strik.es down the said assessment as being null and voi'd to r lack or legal basis.

WHEREFORE, in view of all the fo regoing, the instant Petition lo r Review is hereby GRANTED.

Revenue Memorandum Circular No. 43-91

and Revenue

Memorandum Order No. 15-9 1, classi f'ying pawnshops as lending investors, arc hereby declared NULL and VOID. Accordingly, Assessment Notice No. 81-V /\T- 13-96-2000- 5-1 04 is hereby CANCELLED and SET ASIDE.

I CONCUR:

~-.\~-a ANC IOQ.~A .

Associate .I udge Lw ~ c~~­ ERNEsTo D. ACOSTA

Presiding Judge

CERTIFICATION

I hereby certil'y that the above decision was reached after due consultation with the members or the Court or Tax Appeals in accordance wi th Section 13, Article VIII ol' the Constitution.

~- ~ ct-y./L ERNESTO D. ACOSTA Presidi ng .I udge n' , , } 0 ' j