CTA Case No. 6887 (Decision)

oj - , Republic of the Philippines COURT OF TAX APPEALS Quezon City SECOND DIVISION FIRST PLANTERS PAWNSHOP INC., Petitioner, C.T.A. CASE NO. 6887 __ -versus- Members: CASTANEDA, JR., Chairman UY, and PALANCA-ENRIQUEZ, ll- COMMISSIONER OF INTERNAL Promulgated: REVENUE, MAY 0 9 2005 4�;jt~~r- Respondent. x---------------------------------------------------- x DECISION UY, L_: This Petition for Review seeks the reversal of respondent's Final Decision on Disputed Assessment dated January 29, 2004 denying the protest of petitioner on the deficiency assessments for value-added tax and documentary stamp tax in the amounts of Five Hundred Sixty Four

; . DECISION CTA CASE NO. 6887 Page 2 of19 Thousand Two Hundred Twelve Pesos and 73/100 (P564_,212.73) and Twenty Four Thousand Seven Hundred Forty Seven Pesos and 13/100 (P24,747.13)_, respectively, for taxable year 2000. I'HE FACTS The factual milieu of the case is as follows: I;irst Planters Pawnshop Inc. Cpetitioner') is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with principal place of business at No. 28, C.I. Rodriguez St., Taguig, Metro Manila. It is primarily engaged in the operation of pawnshop business. On the other hand, Commissioner of Internal Revenue ("respondent") ic; the government official in charge of the administration and enforcement of the internal revenue laws of the Philippines with office at the BIR National Office Building, East Triangle, Dillman, Quezon City.

DECISION CTA CASE NO. 6887 Page 3 of19 As per investigation conducted by the Bureau of Internal Revenue ("BIR"), it was discovered that petitioner incurred deficiency value- added tax ("VAT") and documentary stamp tax ("DST") for taxable year 2000. Thereafter, the BIR issued a Pre-assessment Notice dated July 7, 2003 which wa-, received by petitioner on July 12, 2003, informing the latter of its VAT and DST liabilities in the amounts of Five Hundred Forty One Thousand One Hundred Two Pesos and 79/100 (P541,102.79) and Twenty Three Thousand Six I-Iundred Forty Six Pesos and 33/100 (P23,646.33), respectively.1 ()n July 22, 2003, petitioner submitted its position paper questioning the said Pre-assessment Notice for bereft of legal and factual bases.2 On December 29, 2003, petitioner received from the BIR Formal Assessment Notice Nos. VT-53281-00-03-510 and DS-53281-00-03-5103 directing petitioner to pay deficiency VAT and DST in the increased 1 par. 2. Summary of Stipulated Fact<; ~ par. 3 Summary of Stipulated Facts 3 Annexes C- l & C-2, Petition for Review

DECISION CTA CASE NO. 6887 Page4 of19 amount<; of Five Hundred Sixty Four Thousand Two Hundred Twelve Pesos and 73/100 (1'564,212.73) and Twenty Four Thousand Seven Hundred Forty Seven Pesos and 13/100 (P24,747.13), inclusive of surcharge and interest, computed as follows: DEFICIENCY VALUE ADDED TAX Gross Receipts per F/S P 2 680.345 SQ Output tax p 268,034.55 Less: Creditable input tax Basic VAT Deficiency - --- - - - - - p 268,034.55 Add: 50% Surcharge P134,017.28 20% lnterest(1/26/01 to 1/30/04) 162,160.90 296,178.18 e,,~,--~M-~1~ Total amount due and collectible DEFICIENCY DOCUMENTARY STAMP TAX Pledge loan p 5,855.00 e.~,,~,il.�.�p.oo Tax due 7.182.13 Add: 50%surcharge p 11,710.00 20o/olnterest (1/11/01 to 1/30/04 13.037.13 Total amount due and collectible p 24 747134 On January 4, 2004, petitioner filed a protest contesting the assessment. However, respondent, through Acting Regional Director Anselmo G. Adriano, issued a decision dated January 29, 2004 denying petitioner's protest, the pertinent excerpts of which read: "ln reply, Legal Division, this Region stands that Prmmslwps operators should be subjected to Value added tax and Documentary stamp tax citing a very recent decision of Court Appeals dated February 10, 2003 ---���--���-��----- - - - - -- - - 4 par. 5, Sununary of Stipulated Facts

DECISION CTA CASF. NO. 6887 PageS of19 issued in CA-GR SP No. 68.180 entitled "Commissioner of lntemal Reuenue vs. Agencia Exquisite of Bolwl" and has ruled tlzat pawnshops are liable to pay 10% of their gross receipts dt.'Tived frum the sale or exchange ofSt"Toices as value-added tax (VAT) and that you are still liable to pay documentary stamp tax citing the Ruling of t11e Supreme Court in the case of "Cruz vs. Chua". The record of this case disclosed fltat you ltave not introduced ne-w legal basis fo overthrow the validity ofour said assessment." s Aggrieved, on March 11, 2004, petitioner filed a Petition for Review before this Court. In Answer to the Petition, the respondent alleges, inter alia, that the enumeration of persons or businesses under Section 108 (A) of the 1997 National Internal Revenue Code ("NIRC") is not exclusive. Other persons performing services for a fee, who are not expressly mentioned in the enumeration, are also subject to VAT.6 Pawnshops are not confined in the service of lending money to pawners but are likewise engaged in disposing chattels pawned to them in a public auction. Thus, the liability of pawnshops to VAT attaches upon the sale of personal properties when the pawner fails to exercise his right of 5 Annex E. Petition for Review 6 Rollo, p. 48

DECISION CTACASE NO. 6887 Page6 ofl9 redemption over the property pawned within maturity period.7 In the case of Commissioner of Internal Revenue vs. Agenda Exquisite of Bohol, Inc.,8 the Court of Appeals held that pawnshops are liable to pay 10% VAT on their gross receipts derived from sale or exchange of serVI.ces.9 Also, the Supreme Court in the case of Cruz vs. Chua,10 considered the pawn ticket as evidence of the pledge subject to documentary stamp tax (DST).1l THE ISSUES The parties interposed the following issues for the consideration of the Court: 1. Whether or not pawnshops are subject to value-added tax pursuant to Section 108 of the National Internal Revenue Code; 2. Whether or not petitioner is liable for documentary stamp tax.12 7 Rollo, p. 48 3 C.A G.R SP No. 64117 (Feb. 6. 2003) 9 Rollo, p. 48 lO 54 Phil 10 11 Rollo. p. 48 12 Rollo, p. 70

' ', DECISION CTA CASE NO. 6887 Page7of19 THIS COURT'S RULING Anent the first issue, the crux of the controversy is the correct interpretation of Section 108 (A) of the 1997 NIRC which provides: ''SEC. 108. Value Added Tax on Sale of Services and Use or Lease of Properties - (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) ofgross receipts derived from the sale or exchange of seroic:esl including the use or lease of properties. The phrase "sale or exchange ofservices" means the perjonnance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those pt~formed or rendered by construction and service contradors; stock, real_ estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling~ processing, manufacturiug or repacking goods for others; TJToprietors, operators or keepers of hotels, motels, rest hotLses, pension ho-uses, inns, resorts; pro-prietors or operators of restaurants, refreshment parlors, cafes and other eatittg plaus, including clubs and caterers; dealers in securities; lending investors; transportation contractors on tlu~ir transport ofgoods or cargoes, including persons who transport goods or cargoes for hire and other domestic commo-n carriers by land, air and water relative to their transport ofgoods or c.argoes; services offranchise grantees of telephone and telegraplr, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non-bank ftmmcial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical and mental faculties. (Emphasis Ours)

DECISION Cl'A CASE NO. 6887 PageS of19 Petitioner contends that respondent erroneously deduced the phrase "sale or exchange of services~~ under Section 108 (A) of the 1997 NIRC as referring to the operation of pawnshop enterprises. Pawnshops are limited to the activity of forbearance of money which is not equated to service business. Petitioner further argues that as a last ditch effort to include pawnshops within the purview of the law, respondent declared pawnshops as synonymous with the term "lending investors". Pursuant to the case of Commissioner of Internal Revenue vs. Michel J. Lhuillier Pawnshop, Inc.,13 pawnshops are not among the enumerated persons or businesses subject to 10% VAT under the law since they are not lending investors. Respondent, for his part, asserts that Section 108 (A) of the 1997 NIRC should not be limited to the persons or businesses specified therein. The enumeration is simply intended to give examples of business performing services that are subject to VAT. We rule against the petitioner. --������--------������-------- 13 406 SCRA 178

DECISION CTACASF. NO. 6887 Page 9 of19 Under the tenet of ejusdem generis, where general termc; follow the designation of particular things or classes of persons or subjects, the general term will be construed to comprehend those things or persons of the same class or of the same nature as those specifically enumerated.14 The purpose of the rule is to give effect to both the particular and general words, by treating the particular words as indicating the class and the general words as including all that is embraced in said class, although not specifically named by the particular words.l5 General words should be harmonized with specific words to broaden the coverage of the taxing statute. The wording "sale or exchange of services" is not merely restricted to the specific types of persons or businesses enumerated under Section 108 of the NIRC but should be read in conjunction with the general phrase u other service oriented entities". Moreover, the term "including" should be defined as an enlargement and not of limitation. 4 National Power Corporation vs. Angas, 208 SCRA 542 : 15 2 Sutherland, Stat ConsL 3rd Ed. , pp. 395, 400 cited in Rupcrto Martin, Statutory ConstrucLion, 1984 Ed.

DECISION CTA CASE NO. 6887 PagelO of19 "Tlte intention ofan act will prevail ove:r the literal sense ofits terms. Tltus, limited words in one part of an act may be expanded by general words in another part, if the general words more nearly express legislative in leu t. A term wltose statutory definition declares w}Ult it 'includes' is more susceptible to extension of meaning by construction than where the definition declares what a te:rm 'means'. Tltu.s, it has been strid that the word ' includes' is usually an enlargement, and not of limitation. . .. It, therefore, comJeys the cottclusiott that there are other items includable, though not specifically enumerated ... "16 Thus, to limit the application of the enumerated persons or businesses under Section 108 (A) of the 1997 NIRC would contradict the very clear meaning of the phrase of uan kinds of services" .17 Relative thereto, Section 3 of Presidential De<..Tee ("P.D.") No. 114, also known as the Pawnshop Regulatory Act, defines pawnshops as follows: 11 Pawnshop shall refer to a person or entity engaged in the business of lending money 011 personal property delivered fl.'> security for foa11s aud shall be sy11onymous, and may be used interchangeably with, prrumbroker or prrurnbrokerage." Section 14 of P.D. No. 114 further states the other services rendered by pawnshops, to wit: ---��---- - - -- 16 Sutherland, Statutory Construction, 4'h Ed., Vol., 2A, p. 82, Sec. 47.07 citing United States Argosy Ltd. v Hennigan, 404 F2d 14 (CA 5th, 1968); Network Pawnshop Inc. vs. BIR, Tuguegarao City, CTA Case No. 6727 (September 23, 2004) 11 First Express Pawnshop Co., Inc. vs. ClR, CTA Case No. 6529 (September 24, 2004)

�. DECISION CTA CASE NO. 6887 Pagell of19 "Tn tJu~ event the pawner fails to redeem the pa:wn within niuety days from the date of maturity of the obligation in accordanu with the preceding section, the pawnbroker may sell or othemJise dispose any article taken or received by lzim in TJtmm: Provided, Juru'!CVer, That the ptmmer shall be duly notified of such sale on or before the termination of the ninety day period, the notice particularly stating the date, hour and pltu:e ofsale." Prescinding from the foregoing, the liability of pawnshop operators to pay the VAT no longer depends on the classification of their business but on the services they render.l8 The act of lending money at interest as well as selling the property pawned in a public auction upon the default of the debtor to pay the obligation during the ninety (90) day-redemption period clearly constitutes performance of a service for a fee, remuneration or consideration subject to VAT. In a litany of cases, this Court ruled on the meaning of the phrase "sale or exchange of services": From the plain language ofthe la:w the sale or exchange ofservices is subject to VAT and the phrase ".~ale or exchange of .services" encompa..~.~e.~ the performance of all kindv o[ services (or others {or a fee. remuneration or consideration. The enumeration of person.tt performing services for a fee, remuneration or consideration, such a. <o construction and sen,ice contractors, stock, real estate, commercial, custom.5 and immigration brokers, etc., is merely to give exomples of businesses performing :liervice.~ for ll fee, remunertllion or consideration that lire .~ubject to VAT. The enumeration is not exclusive, which means that other ts Forum Pawnshop, Inc. vs. BIR Tuguegarao City, CTA Ca..'lC No. 6718 (September 6, 2004)

DECISION CTA CASE NO. 6887 Page 12 of19 persons performing !iervice.~ for a fee, remuneration or consideration, who are not expres.sly mentioned in the enumeration, llre also subject to VAT 19 In addition, petitioner's reliance on the Lhuillier case to prove that pawnshops do not belong to the class mentioned under Section 108 (A) of the 1997 NIRC as they are not lending investors is misplaced. Contrary to petitioner's assertion, the highest tribunal made a distinction between a pawnshop and lending investor to delineate which entity is subject to percentage tax under Section 116 of the 1977 Tax Code, as am.ended. There was never any proscription on the imposition of VAT against pawnshops as it was not an issue therein but whether or not pawnshops are lending investors so as to be liable to 5% lending investor's tax, viz: 'Wzile it is true that pawnshops are engaged in the business of lending money, they are not considered as "lending investors" {or the purpose of imposing the 5% pen..�entage tax." 19 First Express Pawnshop Co. Inc. vs. Commissioner of Internal Revenue, CTA C..ase No. 6529. (September 24, 2004); Agencia Exquisite of Dipolog, Inc. vs. Hadji Mama Marzoc, CESO V, in his official capacity as Revenue Director, Revenue Region No. 15 of the Bureau of Internal Revenue and the Commissioner of Internal Revenue, CTA Case No. 6748 (May 28. 2004) and Cebu Mabuhay Pawnshop, Inc. vs. Commissioner ofinternal Revenue: CTA Case No. 6266, (March 25. 2004)

DECISION CTA CASE NO. 6887 Page 13 ofl9 Petitioner likewise asseverates that pursuant to R.A. Nos. 9010 and 9238, services rendered by "non-bank financial intermediaries" such as pawnshops are exempt from VAT. We disagree. R.A. Nos. 901Q20 and 923821 pertain to VAT exemption of banks, non-bank financial intermediaries performing quasi- banking functions, and other non-bank financial intermediaries. Said statutes do not apply to pawnshops. Moreover, nowhere is it stated under Section 109 of the 1997 NIRC that pawnshops are among the VAT exempt entities. The 1997 NIRC treats non-bank financial intermediaries differently from pawnshops. Considering that the tax subjects are not similarly situated, they are not to be treated alike or put on equal footing, both in privileges and liabilities. Thus, petitioner cannot claim the defense of tax exemption in its pawnshop business, because the �---�������������--�----��-�-�- :o An Act to Further Defer the tmposition of the Value-Added Tax on Certain Services, Amending for the Purpose Section 5 of Republic Act No. 8424 [NIRCJ, As Amended bv Republic Act No. 8761 z: An Act Amending Certain Sections of the National Internal Reve~ue Code of 1997, As Amended by Excluding Several Services from the Coverage of the Value-Added Tax and Re-imposing the Gross Receipts Tax on Banks and Non-Bank Financial Intenned.iarics Perfonning Quasi-Banking Functions and Other Non- Bartk Financial Intermediaries Beginning January l , 2004

DECISION CTA CASE NO. 6887 Page14 ofl9 exemption can only be granted by clear and unequivocal provision of law on the basis of language, too plain to be mistaken. They cannot be extended by n1ere implication or inference.22 The onus in proving tax exemptions rests upon the taxpayer which petitioner miserably failed to discharge in this case. Petitioner further alleges that interest on pledge loans and past due loans do not form part of petitioner's gross receipts subject to VAT but are forbearance of money; and that liquidated damages are not income from sale or exchange of services. Petitioner's arguments deserve scant consideration. In the case of Kwik Loans Pawnshop, Inc. vs. Commissioner of Internal Revenue,23 We made the following pronouncements: "By the very nature of t1te pawnshop business, mo1le1J is being lent secured on personal f1TOJ1erty. I1te interest on pledge loans and past due loans are not compensation for forbearance of money. The same is true witl1 liquidated damages itt case th.e pawner fails to pay the borrowed money on time. Said loan having been secured on personal property, the pawnshop operator does 1tot suffer any damage if ever tile pawner defaults itt the payment of the borrowed money. T1tis is because itl the pawnshop b11siness, the loaned money is always - -- - - - - � � - � � � � �-��.................... :< Philippine Long Distance Telephone Companv, Inc. vs. Citv ofDavao, 399 SCRA 442 23 CTA Case No. 64 24 (April2l, 2003) � .

. ; DECISION CTA CASE NO. 6887 very much lower than the actual worth of tlte personal property pawned. As regards the sale of the pawned items, what is beiug taxed by the respondent is tlte gain on auction sale and not tire auction per se. But more importantly, gross receipts is defitted i11 Section 108 as follows: "The tenn 'gross receipts' means the total amount of 11WU~11 or its equivalent representing tlte contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services a11d deposits a11d gdvauced payments actually or cottstructively received during tlte taxable quarter for the services perfonned or to be perfomted for another person, excludiug value-added tax" I'hus, all interest iucome, liquidated damages aud gains from auction sale of pawtted items actually or co11structively received by petitioner, having been derived tlS a11 intrinsic part of the pawnshop business, fonn part of the gross receipts of pawttshops subject to VAT. Indubitably, petitioner is liable to VAT on all interest income and liquidated damages as they form part of petitioner's gross receipts. On the second issue of whether or not petitioner is liable for documentary stamp tax, petitioner maintains that a pawn ticket is not subject to DST under Section 195 of the 1997 NIRC which pertains to pledge; and stresses the case of H. Tambunting Pawnshop, Inc. vs. CIR,24 24 erA Case No. 6366 (March 18, 2003)

DECISION CfA CASE NO. 6887 Page16 o�19 which held that a pawn ticket is neither a security nor an evidence of indebtedness. Hence, it is exe1npt from DST under the law. Respondent, however, counters that an ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery of the ticket and the contract of pledge is, therefore, absolvable to bearer. Thus, as the person accepting the pawn ticket, which is the evidence of the pledge, the pawnshop is liable for documentary stamp tax thereon. We agree with the respondent. Section 195 of the 1997 NIRC provides: SEC. 195 -Stamp Tax on Mortgages, Pledges and Deeds of Trnst. - On every mortgage or pledge of lnnds, estate or property, real or personal, heritable or movable, whatsoever, where the same shall be made as a security for the payment ofany definite and certain sum ofmoney lent at the time or previously due and owing or forborne to be paid, being payable and on any conveyance of lnnd, estate, or property whatsoever, in trust or to be sold, or otherwise converted into money which shall be intended only as security, either by express stipulation or otherwise, there shall be collected a documentary stamp tax at the following rates xxx Pawn tickets per se are not subject to DST. The law imposes DST on the privilege to enter a pledge transaction. A documentary stamp tax as

DECISION CfA CASE NO. 6887 Page 17 o�19 an excise tax is levied on the exercise by persons of certain privileges conferred by law for the creation, revision or termination of specific legal relationships through the execution of specific instruments.25 This means DST accrues when the privilege is exercised and not upon the document evidencing the transaction. In the more recent Decision of the Court of Appeals in the case entitled "Commissioner of Internal Revenue vs. Michel J. Lhuillier Pawnshop Inc."26, the appellate court discussed the rationale why the privilege to enter pledge transactions with pawnshops is subject to DST, to wit: "Pawn tickets per se are not subject to Documentary Stamp Tax. Rather, it is the transaction involved that is being taxed. In the case of paurnslwps, the property pawned or pledged, is transferred to lhe pawnshop as security for the payment of money k7Jt. This is where lite Dot::_~mentary Stamp Tax is imposed. True, the pawn ticket is not an roidenc.e of indebtedness as expressly provided under Presidential Decree No. 114. Ilowever, reliance on the pawn ticket to be subject to the Documentary Stamp lax is erroneous. TlwJn..Tv is clear. On every pledge of personal property, "where tire same shall be made as a security (or the payment of any definite and certain sum of money lent," is a documentary stamp tax is imposed, bflsed on tire 25 Philippine Home Assurance Co., ct. al. vs. C.A. and Commissioner oflntemal Revenue, G.R. No. 119446, (January 21, 1999) 26 C.A. G.R. SP No. 67667 (June 29, 2004)

��� DECISION CfA CASE NO. 6887 PagelS o�19 a11JQ11nl involved. Again, adhering to the fundamental rule in construction regarding taxation, any claim for exemption must be slwwn and based on the express provision of the law. Pawnshops are not included in the exemption provided by the National Internal Revenue Code, as amended. " (Underscoring supplied) A pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery of the ticket.27 Therefore, a pawn ticket substantiates the existence of a pledge transaction whereby personal property is offered as a collateral for the loan and the security given may be redeemed upon payment of the debt. And under Section 195 afore-quoted, a documentary stamp tax is imposed on every pledge of personal property where the same shall be made as a security for the payment of any definite and certain sum of money lent. WHEREFORE, premises considered, the Petition for Review is hereby DENIED for lack of merit. Respondent's assessments in the amounts of Five Hundred Sixty Four Thousand Two Hundred Twelve Pesos and 73/100 (P564,212.73) and Twenty Four Thousand Seven n China Banking Corporation vs. Court ofAppeals, 270 SCRA 503 citing the case ofCruz & Serrano vs. A.H. Lee, 54 Phil 15

�� <14 - DECISION crA CASE NO. 6887 Page 19o�19 Hundred Forty Seven Pesos and 13/100 {P24,747.13) representing deficiency VAT and DST, respectively, for taxable year 2000 are hereby SUSTAINED. SO ORDERED. E~~ ~~tUicYe WE CONCUR: ~~~y $ka-i.k Q. ~I~ � OLGA PALANCA-ENRIQUEZ JUANITO c. CASTANEDA, JR. Associate Justice Associate Justice CE R TIF I CATI O N I hereby certify that the above decision was reached after due consultation among the members of this Division in accordance with Section 13, Article VIII of the Constitution. ~....ut; Q .~~ ~~ � JUANITO C. CASTANE!YA,JR. Chairman