CTA Case No. 4853 (Decision)

-~ ] J 1 ~ ; REPUDLIC OF TilE PIIILIPPINES COURT OF TAX APPEALS tlUEZON CITY COMMONWEALTH MANAGEMENT AND SERVICE CORPORATION� Petitioner�, C.T.A. CASE N0.4853 COMMISSIONER OF INTERNAL Pl~omul gated: REVENUE, JUN 22 1995;�i Respondent. X- - - - - - - -- -- -- -- -- -- -- X DECISION This is a petition seeking for the reversal of the assessment issued by the respondent against petitioner in the a�ount of P351,831.01 as alleged deficiency value- added ta~ for the year 1988 itemized as follows: <see page G, CTR records> Ta~able sale/receipt Pl,G79,155.00 p 167,'315.50 10~ ta~ due theron ~;:>~ ;Hrc~~r.:-IJ� 41,'378.88 125,';.f36.63 C2Q0~"PriPn~~tiesr~e''tper~ 1t 'I for\ .'a~,, ~a�vme!it 1�.000.00 tOTAL AMOUNT DUE AND COLLECTtBLE . p 351,831.01 Petitioner is a domestic corporation organized and e~isting under the laws of the Republic of the Philippines with principal office at the Philamlife Buil9ing, UN Avenue, Ermita, Manila. It is an affiliate of tl-te Ohiliooine o~er81;4

DECISION C.T.A. CASE N0.4053 - 2- <Philamlife> and as S\.ICh collection, consultative and othel~ technical These services are performed only for Phila�life and its other affi 1 iates. Specifically it performs the role of internal auditor of the aforecited group of co�panies. On 1992, petitioner received an assess�ent notice for alleged deficiency value-added tax for the year 1988. ln protest, petitioner filed a letter with the BJR on February 10, 1992 �anifesting its objections to the findings of the BJR. 1992, .~ e s pond ent sent petitioner a collection letter of deficiency value-added taH in �~ef e�~ence to the i SS\.ted earlier � Consequently, petitioner sought assistance from this in a petition for review filed on September 29, 1992. Respondent in an attempt to block recourse to this Court raised the issue of lack of jurisdiction on the petitioner failed to file an administ~ative ~rote~t:~gaipst the assessmerit of te.pondent pursuant to Section 229 ~f the Tax code anq, in an apparently f ',,. inconsistent vein goes on to declare thai it s 1 et t e�.. sent to petitioner to enforce collection of value-added tax is not.considered a decision appealable to this Court. 855

DECISION C. T. A. CASE NO. 4853 - 3- In a resolution dated March 15, 1994, this Co\trt reiterated its original stand of acquiring jurisdiction by virtue of the fact that the "letter of demand for pay�ent of taMes constituted the final decision of the Co�missioner hence appealable to this Court" citing the case of Surigao Electric Co.,lnc. vs. Court of Appeals 57 SCRA 523. <see CTA Resolution dated Mal"Ch 15, 1994, page 102, CTA Records). On the �et"i t s, respondent asserts the following special and affir�ative defenses: 10. Petitioner cannot deny that services relating to collections consultative and other technical assistance including the functions of an internal auditor rendered by petitioner in favor of Phila�life Insurance Corporation and its affiliates are considered as sale of services subject to 100S value-added-taM under of Sections 99 and 102 of the 11. Petitioner has failed to overco�e the presu�ption of the correctness of the taM assess�ent <Co�mission of Internal Revenue vs. Antonio Tuazon, Inc., 173 SCRA 397), The objection~ of the petitioner to the assessment are e�bodied in its and

DECISION C.T.R. ORSE N0.4853 - 4- (�Mhibit "E"> citing a�ong others that the services it per�for~�ed for~ Philamlife and its affiliates was on a "no- PJ"Of it, rei�burse�ent-of-cost-only" basis. It is petitioner's theory that the value-added taM for sale of 4� services which replaced the contractor's ta~ is i�posed only if the taMpayer is "engaged in business" and this pht"'ase itself is intet"'Pt"'eted by the petitioner as an activity where "profit is the purpose" or "livelihood is the �otive", hence where no profit is obtained then there ahould be no payment of value-added taM. Petitioner cited the eases of Collector of Internal Revenue vs. Manila Lodge 105 Phil. 983; Collector of Internal Revenue vs. Sweeney <G. R. No. L-12178>, August 21, 1959; Collector of Internal Revenue vs. Club Filipino de Cebu 5 SCRA 321. In the conteMt of this definition, petitioner as&erts that any profit made by their corporation were ~~nse, .Pf~it~~ptr cl~i�s; ;t~at. t~.~~r ~~~rely! reimburse~, for the cos~~ it incurred in prpv~di~g services to ''I. Philamlife and !ts affiliates and ~~~ims that it did not �;, . ~I acquire any prpfit therefrom. Respondent, on the other hand, �aintains that the b'-tsiness of pe-tit i onel"" in to Phil~mlife and its affiliates "falls within the ambjt of

DECISION C.T.R. CASE N0.48S3 - 5- The issue to be resolved in this case is whether or not the services performed by the petitioner including the functions of an internal auditor in favor of Philamlife and its affiliates are considel~ed as sale of services subject to the to� value-added taM. The assess�ent for value-added taM for 1988 is based on Section 102 <a> which provides as follows: SEC. 102. Value-added tax on sale of services.-Ca> Rate and base of tax.- There shall be levied, assessed and collected, a value-added taM equivalent to to� of gross receipts derived by any person engaged in the sale of services. The phrase �sale of services� means the performance of all kinds of services for others for a fee, re�uneration or consideration, including those perfor�ed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of personal property; lessors or distributors of cine�atographic films; persons engaged in �illing, processing, �anufacturing or repacking goods for others, and si�ilar services, regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. Peti~~oner presents to this Coln~t an i nt er�pret at ion ' �.;: -\ >~ of t... h�,_, e.. -~' f~--e; �;~ec.. ' it,~ provision of la~ which tends to deb1..ank '.:�:.. ,1' '� ..... ' : the clai� of respondent that it is subject to value-added lt relies on the argu�ent that for sale of services to be subject to VAT, the entity �ust be engaged in business for profit. As it is, petitioner �aintains that the_. corporation was merely established out of a need of Philamlife to ensln~e 8 ~rat i nnal ll"lt~rlP~~l ',..c.,"�

DECISION C.T.A. CASE N0.4853 - 6- administrative efficiency and never as attested to by its Articles of Incorporation <"Exh. AM"). We resolve this petition in favor of the respondento ln a case involving the same parties entitled Management and Co�.. POl"at ion CCOMASECO> vs. Commissioner of Internal Revenue, CTA Ca�e No. 4423, the petitioner invoked the saae line of defen~� for the payment of the 4~ contractor's t�~ for its 1986 tax 1 i.abi l ity. lt then cited the saae cases a� those in the aforeaentioned case that the jurisprudence relied upon by the petitioner was not applicable for the following reasons: On the other hand, COMASECO, asserted its po�ition that only those corporations which are conducting their operations for profit should be subjected to business tax which includes the contractor~s tax under Se~tiori '70 of the 198G c' Tax Cod~~ .. ln support of i~�.contention, i t cited the ruling in th~ case of c~~lector 0~ Internal Revenue vs. Sweeney <G.R. No. L-12178, August 21, 1959> where it was held: t ,. . J..t ~ 'r~ a"~. made a 1 c~ t t l e P)''Of t o;;; 5UC"h �So::';."� f..',, ,,,. ':859�: :iL

� DECISION C.T.A. CASE N0.4853 7- put on the liquor dispensed, presumably intended to cover expenses, but said profits never went to the �embers of the club, but were used in the operation of the club, which as a �atter of fact incurred a loss, so that it may not be said that in the operation of the bar and in dispensing liquor to its �e�bers or fa�ilies and their guests, the International Club of Iloilo, Inc. was engaged in business and that it was organised for profit." It likewise cited the case of Collector of Internal Revenue vs. Club Filipino de Cebu <5 SCRA 321> where a si�ilar ruling was �ade, to wit: "The Club F i 1 i pi no, Inc. de Cebu was organized to the heathful recreation' and entertain�ent of its stockholders and �e�bers; that upon its dissolution, its re�aining assets, afteJ~ paying debts shal 1 be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from �embership fees and dues; that the Club's bar and restaurant catered only to its members and their guests; that there was in fact no dividend distributed to its stockholders and that whatever was derived on retail from its bar and restaurant was used : ~-'� :' i ti :def;.;ay its ovel~al ]' ovel~head expenses and to i�prove its golf course (cost-pi us-expenses-basis), it stands to reason th~t the Club is not engaged in the business as an operatol~ of bal~ and �~estaurant." However, a thorough analysis of the above rulings indicates that they cannot be applied to the case at bar. 860

DECISION C.T.A. CASE N0.4853 - 8- It is worthy to stress that the respondent, in the two cases abovementioned, seeks to impose a percentage tax on the operation of the bar-restaurants of non-st~ck, non-profit establishments principally and solely organized to promote sports, recreation, and entertainment to its respective me�bers. These bar-restaurants cater exclusively to the members of their respective sports club which are not by themselves engaged in business or profit-making ventures. As pointed out in the case of Collector of Internal Revenue vs. Chtb Filipino de Cebu (ibid.>, the "bar-restaurant was a necessary incident to the operation of the club". The same cannot be said of COMASECO. Its existence is not incidental to the operation of tax-exempt entities. It was specially formed and organized primarily to provide technical and consultative services to its affiliate insurance companies, which undeniably, are conducting business with an end view of profit or livelihood. It can even be said that COMASECO, is not undertaking a non- 861 profit activity, but an essential, if not a

DECISION C.T.A. CASE N0.4853 -9 necessary function of the insurance business. Thus, while it may be admitted that it was organized for "operational orderliness and administrative efficiency, it is not for its own benefit but for the business conduct of its ,, affiliate insurance companies. As to the contention of petitioner that acquisition of profits is the key element that will subject the performance of services to value-added tax, the COMASECO decision has this to say: It therefore becomes immaterial whether COMASECO is realizing any actual profits from its operations. It must be that the liability fpr contractor's tax is not based, on thr amount of profit that inures to tbe benefit of the taxpayer, but on the grosa receipts of its operations. Thus, as far as the law is it is an independent contractor epgaging in the sale of services for a fee taxable under Section 170 <q> of the 1986 Tax Code. by no stretch of imagination can its affiliatec.

DECISION C.T.R. CASE N0.4853 - 10 - civic, fratPrnal, or social Pntity, lPss, a sports club. lt is not among thosP corporations ovpr which thP statP has a distinct and spPcial intprpst so as to bP affordPd thP privilPgP of tax to thosP PnumPratPd undPr SPction 26 of thP prPSPnt Tax CodP. ThP abovP-quotPd dPcision appliPs to thP instant casP inasmuch as thP valuP-addPd tax subjPct of thP assPssmPnt rPplacPd thP 4~ contractor's tax by virtuP of ExPcutivP OrdPr No. 273 which took pffPct on January 1, 1988. WHEREFORE, thP dPcision of thP CommissionPr of IntPrnal RPYPnUP asspssing pPtitionPr dPficiPncy valup- addPd tax for thP taxablP yPar 1988 is AFFIRMED with slight modifications. Accordingly, pPtitionPr is ordPrPd to pay rPspondPnt CommissionPr of lntPrnal RPYPnuP thP amount of P335,831.01 inclusivP of thP 25~ surchargP and intPrPst plus 20~ intPrPst from January 24, 1992 until fully paid pursuant to SPctions 248 and 249 of thP Tax codP. ThP compromisP pPnalty of P16,000.00 imposPd by thP rPs~ondPnt in hPr assPssmPnt lPttPr shall not bP includPd in thP paymPnt as thPrP was no compromisP agrPPmPnt 863

DECISION C.T.A. CASE N0.4853 - ll - entered into between petitioner and respondent with respect to the value-added ta~ deficiency. SO ORDERED. ~c,O~ ERNESTO D. ACOSTA Presiding J\tdge WE CONCUR: ~.GRUBA Ass~~t~1~ge. AMON 0. DE E Associate Jud CERTI:FI:C::RTI:DN I hereby certify that this decision was reached after due consultation aMong the �e�bers of the Cou~t of Tax Appeals in accordance with Section 13 Article VIII of the Constitution. ~Q.Q~ ERNESTO D. ACOSTA Presiding Judge Court of Ta~ Appeals 864