EXQUISITE PAWNSHOP JEWELRY, INC v. JAIME B. SANTIAGO in his capacity as Revenue Regional Director, Revenue Region No. 13 of the BUREAU OF INTERNAL REVENUE and THE COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY EXQU ISITE PAWNSHOP JEWELRY, INC., Petitioner, - versus- C.T.A. CASE NO. 6755 JAIME B. SANTIAGO in his capacity as Promulgated: Revenue Regional Director, REVENUE REGION No. 13 of the BUREAU OF INTERNAL REVENUE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents. X------- ------------------------------- --- ------------X DEC I S IO N This Petition for Review seeks for the cancellation of the alleged deficiency value-added and documentary stamp tax assessments in the amounts of P2,444,000.44 and 1,566,605.55, respectively, issued by respondent for the taxable year 2000. Petitioner is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines. It is engaged in the pawnshop business with business address at A. del Rosario St. Mandaue City, Cebu. On March 13, 2003, respondent issued Assessment Notice Nos.-80-vat- 13-2000-2003-3-128 and 80-dst-13-2000-2003-3-129 against petitioner together with Formal Letters of Demand and Details of Discrepancy (Annexes A-E, Petition for Review). Petitioner was assessed of deficiency value-added tax 01AT)

DECISION- CIA CASE No. 6755 in the amount of P2,444,000.44 and deficiency documentary stamp tax (DST) in the amount of P1,566.605.55, inclusive of surcharge, interest and compromise penalty for the taxable year 2000. On April 24, 2003, petitioner, through tts counsel, filed a formal tax protest (Annex F, Petition for Review) with the Revenue Regional Director (Region 13) of Cebu. And on July 10, 2003, petitioner's counsel received a denial of its protest dated April 23, 2003, on the ground of lack of legal basis (Annex G, Petition for Review). On August 11, 2003, petitioner, through registered mail, ftled herein Petition with a Prayer for Preliminary Injunction. Thereafter, respondent ftled his Answer on September 24, 2003, alleging as his Special and Afftrmative Defenses the following: 3. Petitioner, as a pawnshop operator, performs services for others for a fee, remuneration or consideration. Its gross receipts derived from such services are subject to value-added tax (VAT) imposed under Section 108(A) of the Tax Code (Commissioner of Internal Revenue v. Agencia Exquisite of Bohol, Inc., CA-GR Sp. No. 68180, February 12, 2003; Commissioner of Internal Revenue v. Exquisite Pawnshop & Jewelry, Inc., CA G.R Sp. No. 70319, May 13, 2003). 4. Pawnshops lend money on the security of personal property, that is a pledge. The pledge is evidenced by a pawn ticket. Hence, the pawn ticket is the logical document subject to documentary stamp tax (DST) on pledges under Section 195 of the Tax Code. 5. The assessments were issued m accordance with law and regulations.

DECISION- CIA CASE No. 6755 Page 3 of14 6. All presumpttans are m favor of the correctness of tax assessments. During the proceedings, the parties submitted in their Joint Stipulations of Admitted Facts and Issues flied on December 17, 2003, the following issues to be resolved by this court: 1. Whether or not a pawnshop is engaged in the sale of goods, property or services in the course of its trade or business as to be made liable for the payment of the 10% value-added tax (VAT)?; 2. Whether or not Revenue Memorandum 45-2001 is valid; and 3. Whether or not pawn tickets are subject to documentary stamp tax (DST). The parties also agreed to submit the case for decision after the submission of their respective memorandum in view of the fact that there are no disputed facts and that the issues to be resolved are purely legal. Petitioner contends that pawnshops are not among the entities subject to VAT as referred and enumerated under Section 108(A) of the NIRC, or even prior laws before the amendments thereto considering that pawnshops are not engaged in the sale or exchange of the services to qualify as a VAT taxpayer. Furthermore, petitioner argues that it is incumbent upon the taxing authority and not upon the taxpayer to show that the subject of the tax is clearly covered

DECISION- CTA CASE No. 6755 unde:r the law, and the rule on statutory construction at this point bends in favo:r of the non-taxability of the subject, by virtue of strict interpretation on the imposition of taxes. On the other hand, respondent, in his memorandum, simply enumerated the decisions of this court and the Court of Appeals ruling in favor of the imposition of VAT on pawnshops. Indeed, the legal issue on whether a pawnshop is subject to VAT or not has been passed upon by this court in a litany of pawnshop cases and the recent of which is the case of Agencia Exquisite if Dipofog, Inc. vs. Ha4Ji Mama B. Marzoc, CESO V, in his f![ficiaf capaci!J as Revenue Regional Director, Revenue Region No. 15 if the Bureau if Internal Revenue and the Commissioner tif Internal Revenue, CTA Case No. 6748, Mqy 28, 2004, all pointing to the inclusion of pawnshops as entities liable to VAT under Section 108(A) in relation to Section 105 of the NIRC. Section 108(A) of the 1997 National Internal Revenue Code provides: SEC. 108. Value-Added Tax on Sale ofSeroices and Use or Lease ofProperties.- (A) Rate and Base tif Tax. - There shalf be levied, assessed and collected, a value-added tax equivalent to ten percent (1 0%) ifgross receipts derived from the safe or exchange rif seroices, including the use or lease if properties. The phrase 'safe or exchange of services' means the performance of all kinds of seroices in the Philippines for others for a fie, remuneration or consideration, including those performed or rendered I?J construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors ifpropertJ, whether personal or real,� warehousing services; lessors or distributors rif cinematographic films; persons engaged in milling, processing,

DECISION- CTA CASE No. 6755 Page 5 ofl4 mamifacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; fending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers ry land, air and water relative to their transport ofgoods or cargoes; services offranchise grantees of telephone and telegraph, radio and television broadcasting and all otherfranchise grantees except those under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surery, fidefiry, indemniry and bonding companies; and similar services regardless qfwhether or not the"berformance thereqfcaflsfor the exercise or use qfthepfljsicaf or menta/faculties. xxx. (Underscoring supplied.) From the foregoing provision, it is apparent that the sale or exchange of setvices is subject to value-added tax. The phrase "sale or exchange of services" encompasses the performance of all kinds of services for others for a fee, remuneration or consideration. The listing provided for in Section 108(A) is intended merely to give examples of persons or businesses performing services for a fee, remuneration or consideration. The enumeration is not exclusive, which means that other persons performing services for a fee, remuneration or consideration, who are not expressly mentioned in the enumeration, are also subject to VAT. In the case of GQmez vs. Ventura, 54 Pht1. 726, it was ruled that: ')cxx The maxim expressio unius est excfusio afterius should be applied on!J as a means rif discovering legislative intent and should not be permitted to defeat the plain indicatedpurpose ofthe legislature. It does not appfy 1vhen words are mentioned lzy wqy qfexample. or to remove doubts. (See Qyc., 1122 xxx." (Underscoring ours.)

DECISION- CfA CASE No. 6755 Section 108(A) [formerly Section 102(a)] does not limit its application to those enumerated therein because the law speaks of "all kinds of services". To limit its application to the enumeration would contradict the very clear meaning of the phrase "all kinds of services". In addition, the phrase "including" should be construed merely as an enlargement and not of limitation. 'The intention ofan act willprevail over the literal sense ofits terms. Thus, limited words in one part ofan act mqy be expanded '-!J general words in another part, ifthe general words more near!J express the legislative intent. A term whose statutory difinition declares what it 'includes' is more susceptible to extension of meaning '-!J construction than where the difinition declares what a term 'means'. Thus, it has been said that 'the word 'includes' is usual!J a term qf enlargement, and not qf limitation. . . It, therefore, convos the conclusion that there are other items includable, though not specffical!y enumerated... " [Sutherland, Statutory Construction, 4'h Ed., Vol. 2A, p. 82, Sec. 47.07 citing United StatesArgo.ry Ltd. v. Hennigan, 404 F2d 14 (CA 5'h, 1968); See United States v. GertZ; 249 F2d 662 (CA !Jh, 1957); Federal Land Bank ofSt. Paulv. Bismarck Lumber Co., 314 US 95,86 LEd65, 62 S Ct1 (1941)}. (Underscoring supplied.) Hence, the terms "includes" and "including" do not exclude 1tems otherwise within the scope of the defined term. The terms ''includes" and ''including" when used in the Code are not deemed to exclude items othenvise within the meaning of the term difined. Thus, where Section 1(e) applies to the taxable income ofestates ''including" and therecifter lists four types of income from trusts or estates that are taxable, other types of estates mqy also be suiject to taxation under Section 1(e). To hold different!J would, in iffect, substitute the term ''limited to"for ''including': [Mertens, La11J ofFederal Income Taxation, 1995 Ed., Section 3.37, Chap. 3, pp. 55-56, citing In re Joplin, Jr., 882 F2d 1507 (CA10 1989), app!Jing IRC & 7701(c)J. Moreover, Section 105 of the Tax Code provides:

DECISION - CTA CASE No. 6755 ''A~ry person who, in the course riftrade or business, sells, barters, exchanges, leases goods orproperties, renders senrices, and a~ry person who imports goods shall be suiject to the value-added tax (VAT) imposed in Sections 106 to 108 rifthis Code." In the case of Commissioner of Internal Revenue vs. Exquisite Pawnshop and jewelry, Inc., CA-G.R Sp No. 70319, May 13,2003, the Court of Appeals in ruling that pawn shops are subj ect to 10% VAT held in this wise: 'Elementary is the rule in statutory construction, that when laws or rules are clear, application and not intepretation thererifis imperative. In the instant case, the /au; is clear and leaves no roomfor its interpretation. Section 1Of of the National Internal Revenue Code (NIRC) subjects ...any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, RENDERS SERVICES, and any person who imports goods to a value-added tax (VAT). While Section 108 ofthe National Internal Revenue Code of 1997 defines the phrase ...sale ofserv�ces" as the ...peiformance ofall kinds ofseroicesfor othersfor a fee, remuneration or consideration.,, It includes the services enumerated in the aforementioned section and simt1ar services regardless ofwhether or not the peiformance thereof calls for the exercise or use of physical or mental faculties. The wordings ofthe defin�/'ion ofthe phrase �sale or exchange ofseroices" is unambiguous. It encompasses the peiformance of all kinds of seroicesfor a fee, remunerat�on or consideration. Thus, the sale or exchange rifseroices is suiject to 10% VAT. Indeed, for as long as the entity provides seroice for a fee, remuneration or consideration, then the seroice rendered is suiject to VAT. Section 3 rifPresidential Decree No. 114 defines apawnshop thus: 'Pawnshop shall rifer to a person or entity engaged in the business rif lending monry on personalproperty delivered as securityfor loans. " From the foregoing dtifinition, the fact that, the principal activity rif a pawnshop is lending monry at interest on the security rif personal property is

DECISION - CfA CASE No. 6755 Page 8 of14 instantfy recognizable. Needless to state, the act rflending monry at interest constitutes aperformance rfa seroice for afie, remuneration or consideration. The phrase "all kinds of seroi'ces" as stated in the second paragraph of Section 108 (A) of Republic A ct No. 8424 is broad enough to cover the kind ofseroi'ce which is provided by pawnshops to their bonvwers, that, is lending money in consideration of personal property delivered as secun'ty. Hence, a pawnshop is engaged in the sale ofseroices that is subject to VAT under Section 108 (A) ofthe Tax Code, although it is not specifically mentioned in the law. Clearfy then, pawnshops are suiject to value-added tax." (Emphasis supplied) Judicial no tice may be taken of the fact that the principal activity of pawn sh op s is lending money at interest on personal prop erty delivered as security for the loan. T he act of lending money at interest constitutes the p erfo rmance of a servtce for a fee, remuneration or con sideration for such service. In other words, the liability of pawnshop operators to pay the VAT no longer depends on the classification of their business but on the services they render. As a consequence thereof, any allegation that pawnshops are not lending investors has lost its bearing. For as long as pawnshops are engaged in lending money on the security of personal property, they are still within the ambit of Section 102(a) [now Section 108(A)]. Petitioner, b eing engaged in the pawn shop business, is undoubtedly engaged in the sale of services like lending money. Hence, it cannot escape liability to pay the VAT.

DECISION- CfA CASE No. 6755 Well settled is the jurisprudence that tax exemptions are strictly construed against the taxpayer (Cyanamid Phils., Inc. vs. Court ofAppeals, 322 SCRA 639). In the absence of any clear provision of law exempting pawnshops from VAT, it is our conclusion that pawnshops are subject to VAT on their gross receipts considering that they are clearly engaged in the performance of services for a fee, remuneration or consideration. In the case of Commiss�oner ofInternal Revenue vs. Court ofAppeals and Commonwealth Management and Seroices Corporation, G.R No. 12J3JJ, March 30, 2000, the Supreme Court ruled that the taxpayer, not falling within the exemptions mentioned under Section 109 of the Tax Code, is subject to VAT. The High Tribunal held: "Section 108 if the National Internal Revenue Code if 1997 defines the phrase ''sale ifseroices" as the "performance if all kinds ifseroicesfor othersfor a fie, remuneration or consideration. "xxx XXX XXX XXX Hence, it is immaterial whether the primary purpose if a corporation indicates that it receives pqyments for seroices rendered to its qffiliates on a reimbursement-on-cost basis on!J, without realizing profit, for pmposes if determining liabili!Jfor VAT on seroices rendered. As long as the entiryprovides seroice for a fee, remuneration or consideration, then the seroice rendered iJ subiec/ ~ :; J to VAT. At a'!Y rate, it is a rule that because taxes are the ltftblood if the nation, statutes that all01v exemptions are construed strict!J against the grantee and liberal!J in favor if the government. Othenvise stated, a'!Y exen{btion from the pqyment of a tax must be clear!J stated in the language of the law; it cannot be mere!J implied ther~from. In the case qf VAT, Section 109, Republic Act 8424 clear!J enumerates the transactions exempted from VAT. " (Underscoring supplied)

DECISION- CTA CASE No. 6755 As to the issue of whether Revenue Memorandum Circular 45-2001 dated October 12, 2001 is void or not, the petitioner asserts that RMC 45-2001 is void for being issued beyond the powers of the CIR At the same time the said issuance is not just merely interpretative but also serves as an amendatory provision to the Tax Code. Petitioner further avers that said issuances are also contrary to established rulings issued by the CIR regarding VAT. For easy reference, we quote hereunder RMC 45-2001, dated October 12, 2001: REVENUE MEMORANDUM CIRCULAR NO. 45-01 SUBJECT : Taxability of Pawnshop Operators for VAT Purposes. TO All Internal Revenue Officers and Others Concerned. The issue of whether a pawnshop operator may be taxed as a lending investor under the old lending investor's tax is presently pending adjudication before d1e Supreme Court. It arose from the issuance of Revenue Memorandum Order No. 15-91 dated March 11, 1991, which ruled that the "pawnshop business is akin to lending investor's business activity". Such being the case, pawnshop operators were subjected to lending investor's tax imposed by then Section 116 of the Tax Code of 1977, as amended by Executive Order No. 273. While the issue has been the subject of litigation, Republic Act (R.A.) No. 7716 (R.A. 7716), otherwise known as the Expanded Value-Added Tax Law (EVAT), was passed. It repealed, among others, the old lending investor's tax in order to impose the ten percent (10%) value-added tax (VAT) on all businesses except those specifically declared as exempt from VAT. This amendment was implemented beginningJanuary 1, 1996, pursuant to Revenue Regulations o. 7- 95. The EVAT law was further amended by R.A. 8241 in order to subject all other lines of business to VAT, unless otherwise expressly provided therein. The foregoing amendments to the VAT law leave no room for interpretation. Thus, unless expressly exempt from VAT, any person engaged in d1e sale of goods, property or services in the course of his trade or business shall be liable to the 10% VAT. The definition of the phrase "sale or exchange of service" under Section 108 of the National Internal Revenue Code of 1997 (NIRC) is broad enough to cover other ".. . similar services regardless of whed1er or not the performance thereof calls for the exercise or use of physical or mental

DECISION- CTA CASE No. 6755 faculties . .. ". In view of the repeal of the old lending investor's tax, the issue pending in Court as to whether or not pawnshop operators may be legally levied with the lending investor's tax has become moot and academic. Pawnshop operators are therefore liable to the 10% VAT based on gross receipts beginning January 1, 1996, regardless of the ftnal decision of the Supreme Court on the issue. For purposes of the VAT, gross receipts of pawnshop operators include interest charges, profit from the sale of pawned properties, and all other items of income derived from their business activity. On the basis of the foregoing, all pawnshop operators should have ftled their corresponding monthlyI quarterly. VAT returns beginning the taxable year 1996 up to the present. Those who are not liable to VAT pursuant to Section 109(z) of the Tax Code of 1997 (where the gross annual receipts do not exceed P550,000) should have filed the appropriate percentage tax returns within the same period. All revenue officials and employees are enjoined to give this Circular as wide a publicity as possible. (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner of Internal Revenue 0 fficer-in-Charge From the very text of RMC No. 45-2001, the CIR merely elaborated on the provisions of RA. 7716, otherwise known as the Expanded Value-Added Tax Law. The said revenue memorandum did not in any way amend the provtstons of the law. At the very most, it reiterated what the law already provided for, as can be gleaned from certain paragraphs of the actual text, to Wlt: 'The foregoing amendments to the VAT law leave no room for interpretation. Thus, unless express!J exemptfrom VAT, a'!Y person engaged in the sale rifgoods, property or seroices in the course rifhis trade or business shall be liable to the 10% VAT The difinition rif the phrase "sale or exchange rf service" under Section 108 (A) rif the National Intemal Revenue Code rif 1997 (NIRC) is broad enough to cover other '>cxx similar seroices regardless rifwhether or not the performance thererif calls for the exercise or use rf pi?Jsical or mental

DECISION- CTA CASE No. 6755 faculties xxx" Finally, on the issue as to whether or not pawn tickets are subject to Documentary Stamp Tax, petitioner cites Section 195 of the NIRC, to wit: "On every mortgage orpledge r!flands, estate orproperty, real orpersonal, heritable or movable whatsoever where the same shalf be made as a securiry for the P'!Yment tif mry difinite and certain sum tifmonry lent at the time orpreviousfy due and owing orforborne to be paid .... xxx there shalf be collected a doc11mentary stamp tax at the following rates: xxx" Thus, petitioner deduces from the said provision that a pawn ticket is not a security for the payment of any deftnite or certain sum of money. Petitioner claims that the possession of a pawn ticket is with the pawnee, and not with the pawnbroker thereby highlighting and negating it as an evidence or security for the payment of any indebtedness. Thus, petitioner concludes that a pawnshop ticket should not be subjected and assessed the DST imposed under Section 195 of the Tax Code. Respondent counteracts on the said issue by stating that pawnshops lend money on the security of personal property, that is, a pledge. The pledge is evidenced by a pawn ticket. Hence, the pawn ticket is the logical document that is subject to the DST on pledges under Section 195 of the Tax Code. Respondent emphasizes that pawners present the pawn ticket to redeem the pawned or pledged item, therefore, the pawn ticket is the document evidencing the pledge.

DECISION- CTA CASE No. 6755 The foregoing provision of NIRC, undeniably declares that a document evidencing a pledge of personal property which is made as a security for payment of a loan is subject to documentary stamp tax. Corollarily, Section 3 of P.D. No. 114 (Pawnshop Regulation Act) defines a pawn ticket as the pawnbroker's "receipt" for a pawn. It is neither a security nor a printed evidence of indebtedness. Inasmuch as the document taxable under Section 195 must be the document evidencing the indebtedness and considering that under that Pawnshop Regulation Act, a pawn ticket is not a printed evidence of indebtedness, such pawn ticket cannot be considered as a document subject to documentary stamp tax. (CIR vs. Hon. Andres B. Reyes, Jr., C.A. G.R SP No. 28824, December 23, 1993). IN VIEW OF THE FOREGOING, the instant petition ts PARTIALLY GRANTED. Assessment Notice No. 80-dst-13-2000-2003-3- 129 dated March 13, 2003 assessing petitioner of deficiency documentary stamp tax in the amount of P1,566,605.55 is hereby CANCELLED and SET ASIDE. However, Assessment Notice No. 80-vat-13-2000-2003-3-128 is hereby AFFIRMED except the imposition of compromise penalty amounting to P25,000.00. In the case of Ri'ghtfield Property Ventures vs. Commissioner of Internal Revenue, CTA Case No. 5972, Oaober 16, 2003, this court struck down the compromise penalty of P25,000.00 since a compromise implied mutual agreement. In the absence of s showing that petitioner consented

DECISION- CfA CASE No. 6755 thereto, the compromise penalty cannot be validly imposed (UST vs. Collector, 104 Pht11 062). Accordingly, petitioner ts ORDERED to PAY the amount of P2,419,000.44, representing deficiency value-added tax, inclusive of surcharge and interest, for the year 2000. In addition, petitioner is ORDERED to PAY 20% delinquency interest per annum from April 14, 2003 until the amount is fully paid. SO ORDERED. Associate Justice WE CONCUR: L-b. (J~ ERNESTO D. ACOSTA Presiding Justice (w/ Concurring & Dissenting Opinion) JUANITO C. CASTANEDA, JR. Associate Justice CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~ ~-~ ERNESTO D. ACOSTA Presiding Justice