CTA Case No. 4841 (Decision)

HEPIJHLIC OF THE PHILIPPINES COURt OF TAX APPEALS (JUEXON Cl'l'Y DAO HENG SECURtTJJ�:S (PIILLS.) INC., PeL i t i o u e t� , - versus - C.T.A. CASE NO. 4841 'l'HE COMM ISS JON I'!H OF lNTI':HNAL ~ Promulgated : I<EVENUE, APR 2119!15 Hespuudeul. X- - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION This is au appeal lrum the decision oi respondent Commissioner of internal Revenue denying the protest filed by the petitioner against the tax assessments issued for alleged deficiency percentage and value-added L axe s [ u 1� t h e 1 i 1� s t_ s e Ill e s l e 1� o 1 1 9 8 8 � Petitioue1� is a domestic corporation organized and existing under Lhe la\-Js ol Lhe !'hilippines 1-Jith principal o [ t i c e 1o c a t e d a t� Pas eo th� Hu x as , Mflkati. On April 23, 1991, petitioner 1�eceived a letter lrum respoudenl dated April 10, 19Yl assessing them tor the total amount of P312,808.Bl as unpaicl taxes Jor the first semester of 1988, hroken down a~ follows: i r. J 654

DECISION - G.T.A Case No. 4841 - 2- Deficiency value-added tax (VAT) P 9b,655.Lt5 Deficiency Percentage Tax !' 2 16_J.il:._3 6 (as lendiug investot�) 1:'312,808.81 Total Tax Due Petitioner, through its external auditor, filed a protest aud maintained that the assessments lot� the 6% pet:ceulage tax aucl value--~:uJded Lax for the first semester of 1988 have no factual uur legal basis. Respondent, in a leth~r dated March 31, L992, denied the protest and stouu firmly lJehiuu the 1iuuings ol the HIR examiners. Petitioner then elevated its case Lo this Court and pt�ayed for the cancellation ot the asse~o;Aments issued <'lgainst: them for the first semester of 1988. The as s e s s men t to r perc en tag e t axes i n Ute am o u u l o f P2lb,153.3b stemmed from the belief oi the Bll{ examiners th.at petitioner is a lending investor thus sul>ject to the 6% percentage tax provided in Section 116 ot Lite 1988 Tax Code. The investigation conducted l>y the exa111ine:rs allegedly u11covereu !JeLitiunet's l>nsiness practice of lending money to its clients by auvaucittg the purchase price of the securities bought by its customers and subsequently imposing interest on the monetary advances maue l>y them. lt is their theory that the habituality l>y which this practice is done classifies the petitioner as a lending iuve:.;tu1�. 655

DECISION - C.T.A Case No. 4841 - J- Petitioner disagrees with Lhis conclusion and denies ever having ueeu a leuuittg i.ttvestor. lt insists that it is a stock broker ainl in the course ol engaging in Lhis kind ol business, it entet.�s into agreements with some of its clients ~vhereby petitioner advances the payments on the securities bought by these clients which will eventually LJe paiu on a date agreed upon wiLli additional charges as interest. To pt�ove its point, petitioner presented as oue ul its wituesses, Hs. J::velyn IJipasupi!, their management accnntltAnt in 1988 who t e s...t i f i e d that Ute advances made IJy t he co t'{J o 1� a L ion as a stock. broker are privileges extended Lo its margin clients r-1nd this is a common practice in the lnts i ness ui stock brokerage. Quoted hereunder are portions ot her testimony, thus: A. lu a st:uckLJruket�age business we have two kinds ui clieuts. uue we call a cash client and the other a ma1�gi11 client. As contrasted with a cash clieut a mat:giu client. is allowed to pay lor any ol. the purchases, of course with the mutual a g r e em e u t wi L h L he s Lock LJ r o k e r , 1 o 1' a l. 1 e a s L c e 1� t a i tt p e t� i o d o l: t: i me � A c Rs h client is one who is requested t.o pay ott exactly four days from the date of the transaction to pay ott whatever securities was bought by him. On the other hand, we as a LJroker are also oLJliged to pay on the lourth day lrom the transaction date any p1�uceeus due to a cash clieut. With regard to a margin client, the sales proceeds of a margin client are crediteu to their accouut on the fourth day upon the l:r:ansacLiou day. 656

DECISION - C.T.A Case Nu. 4841 - 4- Q. Mrs. Witness, I would (ike you to clarify what the term margin exactly means? A � T he t e 1111 111 a r g i n 1� e 1 e 1� s to these c 1 i en t s whom we have margin agt�eement with. Which means to say that we at a ce1�tain point in time aJvanceJ fur them the cost of the securities that they bought and per also our agreement with them they at�e suvvoseJ to deposit Lu us a certain � amount to cover for a margin line that we give them. They are allowed to buy aud sell for their account securities as listed in the stock exchanges so that any given time when their account is already due which as l've said all accounts whether cash or margin uu the fourth day from the transaction date. 11 tlley are uot alJle to give us the purchase price we advance for Lltem tll is purchase p1� ice because we are liable Lu a clearing house to pay uli the results of our transaction for any particular day. In its memorandum, petitioner argues that it merely "accommuuated its customers in the pu-rchase of securities, in effect leudiug the secu1�ities un account. ou which it c lJ a 1� g e s i t s c us Lu me 1� s i u l. e 1' e s t " . ll further contenus that such act can uever ue classified as lending money to its customers. The othe1� aspect of the assessment concerns the value-added tax that petitioner allegedly failed to pay for the 1 irst senlester ol 1988 in the amoun ,_ of P96,655.45. The investigation conducted by the examiners led to the conclusion that petitioner allegedly unde rdec 1a1�ed its gross 1' e c t' i p L :::; L h us te::>ulting in the payment of a lesset� amount in value-addeJ Lax thau what 657

DECISION - C.T.A Case No. 4841 - 5- was actually clue itum them lor the ulurementiuuetl {Jeriod. This underdeclaration \vas noted by the examiners when it was discovered that the gross receipts declared in petitioner's day book is more than that reported by the petitioner iu its VAT returns. The total amount of PY6,655.45 as value added Lax was computed as follows: PeL' Day book Per� Return 1st Quarter Sales p 1, 2 '30, y j_ 9. 98 Pl,037,786.9:l 561,268.31 2nd Quarter 809,016.80 Pl,599,055.23 Total P2,CB9,936.78 Diitereuce Basic Tax r l~'~.oss.25 25% Surcharge 20% lnLeresL 11,022.06 Com{Jromise 31,545.14 Total VAT Due 10,000.00 p 96,655.45 Petitioner provided au explanation 1 01' this discrepancy by stating t.hat. its day book entries contained all its t.ransact.ions including the commissions whereas its VAT returns reflected the amounts which already excluded the commissions/rebates which petitioner gave Lu ils clients. The commissions are evidenced by the credit memos oiiered by Lhe petitioner as exl1ibits (Exhibits "l:l" to ".J~T-2"). Petitioner contends that the commissions which it teluuded tu its clients should not 658

DECISION - C.T.A Case No. 4841 - 6- form part o1 ils gross receipts 1 (J 1' the purpose of computing its value-added tax. Respondent disagrees and reiterates he t� or i gina 1 reason for denyiug the protest which is clearly enunciated in her answer to the petition, thus: 4. Petitioner as a VAT registered uusiness entity granted sales discounts/rebates to i t s c L i en Ls wh i c h i l de d u c ted 1 1� om i t s g r o s s sales but suiJsequenLly uisalloweu by respondent's investigating ~evenue enforcers for failure to comply with the following requiremeuts, to wit: a) That the uiscount must ue granteu at the Lime ol the sale; b) That the amount thereol must be indicated as a separate item on the face of the invoice; and c) That the same must form part oi the gross sales July recorded iu the I.Jooks o1 accounts, thereby resulting in the het�eiu deficiency VAT assessment. The two basic issues presenteu to Us for resolution are as fult'ows: 1. Whe Lhet� u t' 11 o L p e L i L i o n e 1� 1 a I 1 :,; u 11 d e ,. the category oJ H letlding invest:or subject Lo' the 6% perceutage tax provided in Section 116 of the Tax Code: 2. Whether or not petitioner cau exclude the amounts given Lu its clients as commissions i~om its gross ~eceipts lor the purpose of computing the value-added Lax. Petitioner submitted its memorandum aud both parties of f e 1� e d the i 1� 1� e s l.l e c l i v e e v i de u c e . 659

DECISION - C.T.A Case No. 4841 - 7- First lssue The iact that petitiunet� received interest income during the first semester of 1988 served as the signpost which led the examiners to delve into its source. It was discovered that a major portion of its interest iucume wAs derived from the amou11ts which the petitioner received for the AdvanceR made by t�hem in buying securities fur some of their clients. Petitioner� admits this iacl uut argues thal their receipt of iuterest income in this manner dues nut make it a lending investor because this practice does not involve the lending of money bnt the lending of chattels (securities) ou account. Fut Lhenuut�e, this is nul dune iu a t�egular or habitual manner to mAke it: tall within the purv ie\v of the definition of a )F~Ilding investor. A careful analysis of the business practice of the petitioner has led this Cout�t to believe that the petitiouer should not be taxed as a leuding investor under Secliuu llG ul Lhe 19BB Tax Code. Section 157(u) of the 1987 Tax Code defineR a lending investor as "one who makes a practice ui lending money for themselves or . olhet�s at intetest". At a glance, we can easily conclude that the petitioner falls squarely within the category of a lending invPstor because admittedly it advances money 660

DECISION - C.T.A Case No. 4841 - 8- to purchase stocks in favor uf some of its clients with the agreement that these be paid at a future date with interest. However we are led to conclude otherwise if seen in the context of the nature of the stockbrokerage industry. The act ot advancing money to buy stocks in the name of some of its cli~nts is necessary and essential in the business of the petitioner because without such arrangement~ the petitioner would lose a big bulk of its clients. The testimony of their ~lanagement Accountant elucidates this point clearly, tbu~. Q. 5 i nee these margin transact itHlS avpeared to be somewhat burdensome to your company, can yuu cite any particular reason why you do engage in this kind of margin transaction? A. Well, most people who strike margin agreement with us are what you call bigger local investors. These are people who have assets but at the moment not that liquid in cash. So for us n0t Lo forgo of the commission that we can get from these people, we have a margin agreement with them. We agree to give them a mar~in line ot say fur example 30 or 60 days depending ott the viability of the client. So we allow them to purchase on a margin line securities for their accounts and they get to pay us as per our agreement. So that is given jo or 60 days but then again their account is also affected by their sale proceeds. If they sell anytime within our agreed number of days then ~heir account is credited for the exact amount of the sale proceeds. lf they sell afler the due date of 661

DECISION - C.T.A Case No. 4841 - 9- their purchase, then they also get credited lor the full amount ui the sale proceeds. If they sell I.Jefore the due date then�the same is also true. In the cases of Insular Life Assurance Company vs. Commissioner of Internal Revenue, CTA Case No. 2336 and Filipinas Life Assurance Company vs. Commissioner of Internal Revenue, CTA Case No. 2337, this Court is resolving the issue of whether or not insurance companies should be taxed as a lending investor made the following declaration, thus: We have had occasion to express the same view. It has been held that "when a person or company is already ~axed on its main business, it may not be further taxed for doing something or engaging in an activity or work which is merely a part uf, incidental to and is necessary tu its main i.Jusiness". (Asturias Sugar Central, Inc. vs. Commissioner of Internal Revenue, C.T.A. Case No. 983, February 14, 1963, citing Standard Vacuum Oil Co. vs. Antigua, 96 Phil. 90Y.) This doctrine was cited� and relied upon by this Court in the Asturias case in connection with the issue of whether or nut the taxpayer therein was liable fot' the fixed tax as a lending investor. The do~ltine is but the result of the correct ~~Pit6~tion of th~ rule of interpretation to d~ter�fne the legislative intent behind revenue law~. Where the law ~axe~ a business, it is e~eagmed tp be the !eatst~tlve intent not to ~~Fer!t~lr tax. everr:~c~i~ity Which is merely Jd~l~pntal Of uecp!S8tl t9 1 the c6nduct of said 'ualge~~- � fUnd~rsbrir.ng supplia~l '~ ' c �' There� ctUl be nu 4uea t: ion. � tfta t ! end i ug r. m0 rt e y at i n t ere s by . l t f e ins uran ~ c 0 lil pall i e s i~�not only incidental to their bu~ipe~s but is ~ss~ritial to tH~Jr v~ry exlsteri6e. No 662

DECISION - C.T.A Case No. 4841 - 10 - insurance company can survive without investing its funds in loans. In the instant case, it is indeed necessary to enter into such liberal arrangements whereby petitioner advances money to buy securities in order to maintain a big bulk of their clients thereby protecting their commissions which comprise their main source of ittcome. In the stockbrokerage industry, this may be considered a "business-saving" device and because such practice is essential and incidental tu theit� main activity then thia should not be taxed separately. The illterest derived by the petitioner uu the monetary 11dvanG~I!} it made during the first semeater of 1988 wa~ ~roperly declan~d in its final income tax return (see page 39, BIR Records) and we find that the same interest income should not be taxed again on percentage tax imposed by Section 116 of the 1988 Tax Code. However, considering that this interest income was earned by reason of its stockbrokerage operation said income should form part of "gross receipL" fur VAT purposes. In conclusion, we find the assessment for percentage t taxes for the it�st semesLer ui 1988 improper as we do not find apy sufficient legal and factual basis to sustain the sa~e . . c~conli !. ss 663

DECISION - C.T.A Case No. 4841 - 11 - Petitioner admitted that there was a discrepancy in the figures in its day ~ook with those that were indicated {n the VAT returns in the amount of P440,881.55 for the first semester of 1988 and this is because it already excluded the commissions/rebates it had granted to its clients resulting in a decreased amount of gross receipts. Respondent claims that the exclusion of these commissions cannot be allowed because it does not conform to the requirements provided in Section 100(d)(3) of the Tax Code. On the 6ther hand, petitioner insist~ that Section 100(d)(3) of the Tax Code applies only to the sale of goods and as a stockbroker it i~ engaged not in the sale of goods ~ut in the sale of services. We agree with the petitioner that the aforementioned Section 100(d}(3) refers to sale of goods hence cannot be applied to the business of the petitioner which involves the sale of services. Nevertheless petitioner is still subject to the provision found in Section 102(a) of the T<lX Code, thus� . SEC 102 Va lu~-added ~ax on sa 1e of s~1~~ces (a) RaLe aud base of Tax. There shall be levied, assessed anq collected, a valu~-adde~ tax eqtitvaleri~ tb 10% of gross receipts d~r~ved by any� per~on engaged in the ~ale of . services. The phrase "sale of services" means the performance of all kinds of ser�vi<.:e~ i~n� others for: a ftie, remuneration or cousider:atlqn, including those performed or rendered by construction and services 664

'. DECISION - c.T.A Case No. 4841 - 12 - con t r a c to r s ; s Lock , t� e a 1 e s La L e , com me t� c i a 1 , customs and immigration brokers; lessors of personal property; lessors or distributors of cinem~tographic films; persons engaged in milling, processing, manufacturing or repacking goods for others, and similar services, regardless of whether or not the performance thereof calls lor the exercise or use of the physical or mental facilities. xxxxx The aforementioned law speaks of "gross receipts" and this term has been defined by VAT Implementing Regulations as: "The total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value- added tax." The tel'ln "gross receipts" has been interpreted to mean the whole amount received by the contractor without any deduction (p. 378, Hector s. de Leon, 1994 Natiorial Internal Revenue Code Annotated). Therefore it was erroneous on the part of the petitioner to exclude the commissions/r~ba~es i t granted to its clients because t~1is b:aq the effect of ~imitlishing the total amount it recei~ed from enaaging in the business of stock brokerage 1� for this reason that the assessment issued by the respondent for the value-added tax for the first semester of 1988 cannot be set aside. 665

DECISION - C.T.A Case No. 4841 - 13 - lt i~ important to note that respondent failed to include the interest income received by the petitioner for the above-mentioned period as part of the "gross receipts" subject to value-added tax. As quoted earlier, gross receipts refers to the "total amount of money xxxxx received dut�ing the taxable 4uarter fur the services performed or to be performed for another person excluding value-added tax". (supra) This definition itself is broad enough to embrace all kinds of income received by the taxpayer in connection with its brokerage services which as discussed earlier includes the interest income .being taxed separately by the respondent. Unfortunately, respondent did not assess deficiency value-added tax from the interest income of the petitioner. Inasmuch as we are not in the position to issue assessment notices because such is the sole prerogative of the Commissioner of Internal Revenue, this Court is confined to recommend that in the future all interest income received by the petitioner from its stockbrokerage business must form part 6t .t~e gross receipts subject to the 10% value-added tax. In view of all the foregoing, the deficiency percentage Lax assessment issued against petitioner for the .f.' i n~ t s em e s t e r of �1 9 8 8 i n L he tun o u u t o 1 P216,153.36 666

DECISION - C.T.A Case No. 4841 - 14 - is hereuy cancelled. and. set aside and respondent is ordered to desist from collecting said amount. With respect to the deficiency value-added tax assessment, we ' hold the petitioner corporation liaule in the amount of P86,655.45 inclusive of the 25% surcharge plus 20% interest from April 10, 1991, the date it was demanded for payment, until fully paid pursuant to Sections 248 and 249(c)(3) of the Tax Code. The tax due from the petitioner is less than that assessed by the t�espondent in the amount of P96,655.45 as we excluded the compromise penalty ot PlO,OOO.OO because there was no compromise agreement entered into between the petitioner and respondent wi Lh t�espec l to i Ls v a 1ue- added tax deficiency. SO ORDERED. ~Q4~ ERNESTO D. ACOSTA Presiding .Judge WE CONCUR: (On leave) HAN 'L K. GRUBA ciate Judge RAMO~N ~0. ~DE~~t({ i~ Associate Jud 667

DECISION - C.T.A Case No. 4841 - 15 - CE.H.'T _LF ICA'T ION I � here~y certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13 Article VIII of the constitution. ~ ��".t; Ull ~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 668