FORUM PAWNSHOP, INC v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FORUM PAWNSHOP, INC., Petitioner, -versus- C.T.A. CASE NO. 6718 BUREAU OF INTERNAL REVENUE, Promulgated: TUGUEGARAO CITY, SEP 0 6 20Q,'� Respondent. ~4�Z7~1 x ---------------- - -----------------------------------------x DECISION The instant Petition for Review is an appeal to reverse and set aside the decision of the respondent finding petitioner liable for deficiency value-added tax in the amount of P449,126.24 for taxable year 1999. Petitioner is a private corporation duly organized and existing under and by virtue of the Philippine Laws and engaged in the pawnshop business. Through Letter of Authority No. 00062169 dated November 6, 2001 , respondent caused the examination of petitioner' s books of accounts and accounting records relative to the latter' s all internal revenue taxes for taxable year 1999 (page 109, BIR Records). As a result of the investigation, respondent issued a letter dated March 20, 2003 informing petitioner about the proposed assessments for deficiency value-added tax (VAT) of P443,472.20, deficiency documentary stamp tax (DST) of P9,560.00 and

DECISION- CTA CASE NO. 6718 PAGE2 suggested compromise penalty of P67,500.00 or in the aggregate amount of P520,482.20 based on the revenue examiner' s findings that: " 1. The corporation is liable to pay the value-added tax pursuant to Section 108 of the National Internal Revenue Code of 1997. However, it failed to file its value-added tax returns and failed to pay the corresponding value-added tax in violation of Section 114 of the National Internal Revenue Code of 1997; and 2. The corporation also failed to pay the corresponding documentary stamp tax on its subscribed capital stock in violation of Section 175 of the same Code." In the same letter, respondent invited petitioner to an informal conference to present its side ofthe case (pages 145-146, BIR Records). In a letter dated April 11 , 2003, petitioner requested for a reconsideration insofar as the deficiency documentary stamp tax assessment is concerned and submitted photocopies of BIR Forms 0607 (Voluntary Assessment Program) and 2106-DS (VAP Availment Form - Documentary Stamp Tax) and Revenue Official Receipt 00476653 showing payment of the DST on December 14, 2001 (pages 147-150, BIR Records). On April 30, 2003, respondent issued Audit Results/Assessment Notices for petitioner' s alleged deficiency VAT ofP447,224.89 and deficiency DST ofP9,626.67, all inclusive of surcharges and interests, and suggested compromise penalty of P67,500.00 totalling P524,351.56 (pages 139-141, BIR Records). In a letter dated May 2, 2003, petitioner requested for a reconsideration attaching thereto a copy of this court' s decision in the case of Prime Asia Pawn and Jewelry Shop, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6304, dated April4, 2002,

DECISION- CTA CASE NO. 6718 PAGE3 holding that a pawnshop is not subject to VAT and photocopies of BIR Forms 0607 and 21 06-DS and an official receipt showing payment of the alleged deficiency DST on December 14, 2001 (pages 148-162, BIR Records). By its letter of May 15, 2003, respondent cancelled the deficiency DST assessment but reiterated that petitioner is liable to pay VAT pursuant to Section 108 of the NIRC of 1997 and Revenue Memorandum Circular 45-2001 and is required to file VAT returns and pay the corresponding VAT due in accordance with Section 114 of the same Code. Correspondingly, respondent demanded from petitioner the payment of the recomputed deficiency VAT ofP449,126.24 not later than June 15, 2003 (pages 164-165, BIR Records). Not satisfied with the decision of the respondent, petitioner appealed before this court on July 4, 2003 . In its Answer to the Petition for Review, respondent raised the following Special and Affirmative Defenses: 4. The assessment for deficiency VAT in the amount of P449,126.24 for the year 1999 was issued against petitioner in accordance with law and regulations; 5. Petitioner, as a pawnshop operator, performs services for others for a fee, remuneration or consideration. Its gross receipts derived from the sale of such services are subject to VAT under Section 108(A) of the Tax Code (Commissioner of Internal Revenue vs. Agencia Exquisite of Bohol, Inc., CA- G.R. SP No. 68180, February 12, 2003; Commissioner of Internal Revenue vs. Exquisite Pawnshop and Jewelry, Inc., CA-G.R. SP No. 70319, May 13, 2003); 6. All presumptions are in favor of the correctness of tax assessments.

DECISION- CTA CASE NO. 6718 PAGE4 The parties agreed that the only issue to be resolved in the case at bar is whether or not petitioner, as a pawnshop operator, is subject to VAT (page 53, CTA Records). Petitioner contends that the services of pawnshops are not among those enumerated as subject to VAT under both Sections 108(A) of the NIRC of 1997 and 102 (a) of the old Code. Relying on the case of Trustworthy vs. Collector of Internal Revenue, CTA Case No. 5691, March 7, 2000, petitioner likewise argues that the services of pawnshops are not similar to those rendered by lending investors. Respondent, on the other hand, maintains that pawnshop operators, being engaged in the sale of services are subject to VAT pursuant to Section I08(A) of the NIRC of 1997 citing the case of Commissioner ofInternal Revenue vs. Exquisite Pawnshop and Jewelry, Inc., CA-G.R. SP No. 70319, May 13, 2003. Respondent alleges that granting, for the sake of argument, that for purposes of the VAT, pawnshops are not similar to lending investors, their services fall under the phrase "all kinds of services" used in Section 108(A) of the NIRC of 1997, even if they are not included in the enumerations subject to VAT. We agree with the respondent. The issue presented is not a novel one as this court had already ruled in a number of previous similar cases, the more recent of which is Regional Pawnshop, Inc. vs. Burea11 of Internal Revenue, South Solano, Nueva Viscaya, CTA Case No. 6709, promulgated on August 9, 2004, that pawnshops are subject to VAT. For easy reference, we quote hereunder the pertinent provisions of Section 108(A) of the NIRC of 1997, thus:

DECISION- CTA CASE NO. 6718 PAGES "SEC. 108. Value-added Tax on Sale of Services and Use or Lease ofProperties. - "(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (1 0%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. "The phrase 'sale or exchange ofservices' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; 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, manufacturing 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; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non-bank fmancial 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 or mental faculties (Emphasis ours). From the foregoing, the sale or exchange of services is subject to VAT. The phrase "sale or exchange of services" encompasses the performance of all kinds of services for a fee, remuneration or consideration. The enumeration of persons performing services for a fee, remuneration or consideration, such as, construction and service contractors, stock, real estate, commercial, customs and immigration brokers, etc., is merely to give examples of businesses performing services for a fee, remuneration or consideration that are subject to VAT. The enumeration is not exclusive, which means

DECISION- CTA CASE NO. 6718 PAGE6 that other persons performing services for a fee, remuneration or consideration, who are not expressly mentioned in the enumeration, are also subject to VAT. As held in the case of Gomez vs. Ventura, 54 Phil. 726: "xxx The maxim expressio unius est exclusio alterius should be applied only as a means of discovering legislative intent and should not be permitted to defeat the plain indicated purpose of the legislature. It does not apply when words are mentioned by way of example, or to remove doubts. (See Cyc., 1122) x x x" (Emphasis ours.) Section 108(A) [formerly 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". The phrase "including" should be construed merely as an enlargement and not of limitation. "The intention of an act will prevail over the literal sense of its terms. Thus, limited words in one part of an act may be expanded by general words in another part, if the general words more nearly express the legislative intent. A term whose statutory definition declares what it ' includes' is more susceptible to extension of meaning by construction than where the definition declares what a term ' means'. Thus, it has been said that the word 'includes' is usually a term of enlargement, and not of limitation . . . It, therefore, conveys the conclusion that there are other items includable, though not specifically enumerated..." Sutherland, Statutory Construction, 4th Ed., Vol. 2A, p. 82, Sec. 47.07 citing United States Argosy Ltd. v. Hennigan, 404 F2d 14 (CA 5th, 1968); See United States v. Gertz, 249 F2d 662 (CA 9th, 1957); Federal Land Bank of St. Paul v. Bismarck Lumber Co., 314 US 95, 86 L Ed 65, 62 S Ctl (1941 ). (Emphasis ours.) Hence, the terms "includes" and "including" do not exclude items otherwise within the scope of the defined term.

DECISION- CTA CASE NO. 6718 PAGE7 The terms "includes" and "including" when used in the Code are not deemed to exclude items otherwise within the meaning of the term defined. Thus, where Section 1(e) applies to the taxable income of estates "including" and thereafter lists four types of income from trusts or estates that are taxable, other types of estates may also be subject to taxation under Section 1(e). To hold differently would, in effect, substitute the term "limited to" for "including". Mertens, Law of Federal Income Taxation, 1995 Ed., Section 3.37, Chap. 3, pp. 55- 56, citing In re Joplin, Jr., 882 F2d 1507 (CAIO 1989), applying IRC & 7701(c). In the cases of Genato Commercial Corporation vs. The Court of Tax Appeals, et al., 104 Phil. 615 and Philippine-American Drug Co. vs. Collector of Internal Revenue and Court of Tax Appeals, 106 Phil. 161, general words were harmonized with specific words found in the statute in question so as not to limit the coverage of the taxing statute. In determining that the bank charge in question formed part of the charges enumerated in Art. 183-(B) of the then Tax Code, the Supreme Court held: As may be seen, an importer is required to pay in advance the necessary percentage tax on the articles imported "based on the import invoice value thereof, certified to as correct by the Philippine Consul at the port of origin if there is any, including freight, postage, insurance, commission, customs duty, and all similar charges." In other words, the law requires that it be included in the assessment not only the import invoice value of the merchandise, which includes freight, postage, insurance, commission, customs duty, but all other similar charges which would necessarily increase the landed cost of the merchandise imported, which, in our opinion, should include the difference of Php 0.15 paid by petitioner to a local bank in the purchase of foreign exchange to carry out the importation. Indeed, the intention of Congress in enacting the above- quoted provision is to include in the assessment all charges, whether specified or otherwise, which an importer has to pay to complete his importation. Invoking the rule of ejusdem generis which provides that "where, in a statute, general words follow a designation of a particular subjects or classes of persons, the meaning of the general words will ordinarily be presumed to be restricted by the particular designation, and to include only things or persons of the same kind, class or nature as those

DECISION- CTA CASE NO. 6718 PAGES specifically enumerated," petitioner contends that the difference of Php 0.15 which it paid to a local bank in the purchase of foreign exchange to cover the importations in question cannot be included in the assessment for the purpose of determining the advance sales tax because they are not similar to the charges specifically enumerated in the law. With this we disagree, for it cannot be denied that the intention of the law is to include all charges, that may be paid by the importer to bring the importation into the country. In other words, all items of expense that may be incurred by the importer in bringing the importation into the country and which would necessarily increase the landed cost must be deemed included in the phrase "all similar charges" mentioned in the law. The doctrine of ejusdem generis is but a rule of construction adopted as an aid to ascertain and give effect to the legislative intent when that intent is uncertain or ambiguous, but the same should not be given such wide application that would operate to defeat the purpose of the law. In other words, the doctrine is not of universal application. Its application must yield to the manifest intent of Congress (State vs. Prather, 21 L.R.A. 23, 25). In the case at bar, the law is not only definite in its intent but also in its wording that "all kinds of services" should be subject to VAT. To emphasize, this court believes that the time-honored rule on statutory construction which states that the maxim "expressio unius est exc/usio a/terius" does not apply when the words are mentioned by way of example or to remove doubts is applicable in the case at bar. Therefore, pawnshops, like the other businesses enumerated in the law which are engaged in the sale of services, are subject to VAT. Furthermore, Section 105 of the NIRC of 1997 provides: "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 shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code."

DECISION- CTA CASE NO. 6718 PAGE9 Inasmuch as pawnshops are engaged in the sale of services for a fee, remuneration or consideration, they are subject to VAT under Section 108(A) of the NIRC of 1997. Moreover, it bears stressing that Section 3 of Presidential Decree No. 114, otherwise known as the "Pawnshop Regulatory Act", defines a pawnshop as follows: "Pawnshop shall refer to a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably with, pawnbroker or pawnbrokerage." Judicial notice may be taken ofthe fact that the principal activity of pawnshops is lending money at interest on the security of personal property. The act of lending money at interest constitutes the performance of a service for a fee, remuneration or consideration 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 108(A). Petitioner, being engaged in the pawnshop business, is undoubtedly engaged in the sale of services like lending money. Hence, it cannot escape liability to pay the 10% VAT under Section 108(A) ofthe Tax Code, as amended. Lastly, Section 109 [formerly 103] of the NIRC of 1997, enumerates the transactions that are exempt from VAT. Pawnshop transactions are not among the exempt transactions. Neither are there any express provisions of law exempting pawnshops from VAT. Since the transactions of pawnshops are not among those

DECISION- CTA CASE NO. 6718 PAGE 10 enumerated in Section 109 [formerly 103] of the NIRC of 1997 or any other express provision of law as VAT exempt, the same are subject to VAT under Section 108(A). In this regard, tax exemptions are strictly construed against the taxpayer. In the absence of any categorical provision of law exempting pawnshops from VAT, ergo pawnshops are subject to VAT on their gross receipts since they are clearly engaged in the performance of services. In the case of Commissioner of Internal Revenue vs. Court of Appeals and Commonwealth Management and Services Corporation, G.R. No. 125355, promulgated on March 30, 2000, the Supreme Court ruled that the taxpayer, not falling within the exemptions mentioned under Section 109 [formerly 103] of the NIRC of 1997, is subject to VAT. The High Tribunal held: "Section 108 of the National Internal Revenue Code of 1997 defines the phrase "sale of services" as the "performance of all kinds of services for others for a fee, remuneration or consideration." x x x XXX XXX XXX Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom. In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted from VAT. [Emphasis ours]

DECISION- CTA CASE NO. 6718 PAGE 11 WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit. Accordingly. petitioner is ORDERED to PAY the respondent deficiency value- added tax for taxable year 1999 in the amount of P449,126.24 (inclusive of surcharge and deficiency interest). In addition. petitioner is hereby ORDERED to PAY the respondent 20% delinquency interest computed from June 16. 2003 until full payment thereof pursuant to Section 249(C)(3) of the NIRC of 1997. SO ORDERED. a~~a.~~~ ~ � fuANITO C. CASTANEDA, .J�. Associate Justice WE CONCUR: (On Official Leave) ERNESTO D. ACOSTA Associate Justice CERTI F I C ATION 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. tiOUuA~N-ITcO-ce. C. A~ ST~ ANE- DA,~Q... Associate Justice