CTA Case No. 3111 (Decision)

'!!! L ! !-'PI'-)',. o -Hn� .;-: T /~\. A?PU.US nr.: rat1 tJ run / TOURS SPECIALISTS, INC. , Petitioner , - versus - C.T.A. CASE NO. 3111 CO~~ISSIONER OF INTERNAL REVENUE , Respondent. _ X- - - - - - - - - - - - - - - X DE C , I S I 0 N This is an appeal by petitioner Tours Specialists, Inc., from the decision of respondent Commissioner o f Internal Revenue holding the former liabl~ for the pay- ment of deficiency cont~actor's tax in the amount of ~122,946.93, for the years 1974 to 1976, inclusive, in accordance with Sections l83(a) ~ taken in relation to Section 191 (now Sections l93(a) and 205) of the National Internal Revenue Code, as amended. Pe titioner is a domestic corporation organized under the laws of the Philippines with principal offices at Makati, Metro Man i la. For the years 1974 to 1976, petitioner had derived income from its activities as a travel agency by servi- cing the needs of foreign tourists and travelers and Filipino "Balikbayans" during their stay in this country . Some of the services extended to the tourists consist of booking said tourists and tr avelers in local ho tels f o r their lodging and board needs; transporting these foreign

DECISION - CTA CASE IINO. 3111 - 2- tourists from the airport to their respective hotels, and from the l atter to the airport upon their departure from the Philippines; transporting them from their hotels to various embarkation points for local tours, visits and excursions; securing permits for them to visit places of interest; and arranging their cultural entertainment, shopping, and recreational � activit i es. In or der to ably supply these services to the foreign tourists, petitioner and its correspondent counterpart tourist agencies abroad have agreed to offer a package fee for the tourists. Although the fee ti> be paid by said tourists is quoted by petitioner, the payments of the hotel room accom:nodations, food and other. personal expenses of said tourists, as a rule, are paid directly either by tourists themselves, or by their foreign travel agencies to the l ocal hotels. (Pp. 77, t.s.n., Feb. 2, 1981 ; Exhs. 0 & 0-1, p. 29, CTA rec.; pp . 24--QS, t.s.n., ibid.) and restaurants or shops, as the case may be. It is also the case that some tour agencies abroad requests the local tour agencies, such as the petitioner in the case, that the hotel room charges, in some specific cases, be paid through them. (Exh. Q , Q-1, p . 29 CTA rec., p. 25, T.s . n., ibid, pp . 5-6, 17-18, t.s.n., Aug . 20, 1981. i s..e.e, Al,s.Q Exh'. "U': , pp. 22-23, t. s. n . , 32J

DECISION - CTA CASE NO. 3111 - 3- Oct. 9, 1981, pp. 3-4, 1 1, t.s.n., Aug,. 10, 1 982 .) By 'this arrangement, the f or eig,n tour agency entrusts to the petitioner Tours Specialists, Inc. the fund for hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed. The procedure observed is that the billing hotel sends the bill to the petitioner: The local hotel identifi e s the individual tourist, or the particular groups of t our ists by code name or group des i gnation and also the duration of their stay for purposes of payment. Upon receipt of the bill, the petitioner then ~ays the local hotel with the funds entrusted to it by the for.eign tour correspondent a~ency. Despite Lh 1s arrangement, respondent Commissioner of Internal Revenue assessed petitioner for deficiency 3% contractor's tax as independent contractor by inclu- ding the entrusted hotel room charges in its gross receipts from services for the years 1974 to 1976. Con- sequently, on December 6, 1979, petitioner received from respondent the 3% deficiency independent contractor's tax assessment in the amount. of ~122,946.93 for the years 1974 to 1976 , inclusive, computed as follows: 1974 deficiency percentage tax p 3,995.63 per investigation � � . . . . . 15% surcharg e for late 998.91 payment � � � � � 4,994.54 324 �

DECISION - CTA CASE NO. 3111 - 4- 14% interest comput.ed by PI 8,847.72 quarters up to 12-28-79 �� 3,953.18 1 975 ~�! icie ncy percentage tax Eer invest.igation � � � � .PI8,427.39 25% surcharg e for late payment � � � � � � � . 2,1 06.85 �1~0,534 .2 4 14% interest computed by PI 17,342.71 quarters up to 12-28-79 � 6 , 808 .47 1976 deficiency ~ercentage tax 54,276.42 per investiga~ion .PI 13,569.U:_ 25% surcharge for late .. 67,845.53 payment � � � � �� fl 14% interest computed by quarters up to 12-28-79 28,910.97 PI 96,756 . 5�0 Pl22,946.93 . . . . . . . . . Total amount due � . .. In addition to fhe deficiency contractor's tax of �1122,946.93, petitioner was assessed to pay � a compromise penalty of P500.oo. Subseque~tly, on Deeember 11, 1979, petitioner for- mally proteste d the a ssessme nt made by respondent on the ground that the money received and entrusted to it by the t ourists, earmarked to pay hotel room charges, were not considered and have never been considered by it as part of its taxable gross receipts for purposes of c omput ing and paying its contractor' s tax. During one of the heari ngs in this case, a witness, Serafina Sazon, Certified Public Accountant and in charge of the Accoun ting Depa�rtment of petitioner, had testified, her credibility not having been destroyed 32u

DECISION - CTA CASE NOe 3111 - .5 - on cross examination, categorically stated that the amounts entrusted to it by the foreign t ourist agenc ies intended for payment of hotel room charges were paid entirely to the hotel concerned, without any portion thereof being diverted to its own funds. (t.s.n . , Fe b. 2, 1981, pp . 7, 25; t.s .n., Aug. 20, 1981 , pp. 5-9, 17 - lB) 'l'h e .t e st i mony of Se ra fi na Sazo n was corroborated by Ger ar do Isada, Ge nera l Man a g e r o f peti- tioner, declaring to the effect that payments of hote l accommodation are made through petitioner without any increase in the room charged (t.s.n., O~ t . 9, 1981, p p . 21 - 25) .and that the r ea son why to u rists pay their room charg e, or thro~gh their foreign tourist agencies, is the fact that the room c barge is e xemp t from ho te l r oom tax unde r P.D. 31. (t.s.n., Ibid, pp. 25- .29.) w�;i;tne s s Isada stated, on cro s s -e xamination, that if their payme nt is made, thr u petitioner's t our agency, the hote l cost or charges "is only an~ of accommodati o n on our ( i ts ) part11 or that t he "agent: abroad instead of sending several telexes and sav ing on bank c harge s they take the option to sen d the mone y in us to b e held in t~rust: to be endorsed t o t he hotel." (pp . 3 - 4 , t.s.n., Aug. 10, 198 2. ) . Neverthele s s, on June 2, 1980 , respondent, without d ec i d ing t he petitioner' s writ.1i:en protest, caused t h e issuance of a warrant. of dist:.r.aint: and levy .

DECISION - CTA CASE NO. 3111 - 6- BIR Rec.) And later, respondent had petitioner's bank deposits garnished. (pp. 48 - 50, BIR Rec.) Taking th is action of respondent as the adverse and final decision on the disputed assessment, petitioner appealed to this Court. The only issue in this case is whether or not the hot e l room charges he-ld in � trust for foreign tour istts and travelers and/or correspondent foreign travel agencies and paid to local host hotels forms part of the taxable gross receipts for purposes of the 3% contractor's tax. , Petitioner does not dispute the fact that it is an independent contr~ctor as defined and contemplated under Section 191 (now section 205) of the National Internal Revenue Code, as amended. Under this provision of law, taken "in relation t:o Section l93(a) '� the taxpayers who are liable to pay contractor's tax are required to file returns and to pay the said tax due thereon within twenty ( 20) .days after the end of each month. The records of this case reveal that petitioner, a travel agency, had religiously and consistently filed its returns as an independent contractor and has paid the 3% percentage tax due on its gross receipts. (pp. 2 - .21, BIR rec.) However, i t never includ~d as part of its gross 3 2'/

DECISION - CTA CASE NO. 3111 - 7- receipts in its retu;-ns, at any one time, the amounts of money entrusted t o it by foreign tourists and tra- \elers and/or tour agencies earmarked to pay the hotel room charges of said tourists and trave lem believing from the very outset that these sums bf money are not includible as gross receipts for 3% contractor's tax purposes. Petitione~ had,� the refore, consistently excluded these payments of hotel room charges from its gross receip ts. Firstly, in support of its position that the hotel room charges do not form part of the gross receipts from its se rvices, petitioner cites in its favor Presidential Decree No . 31, promulgated on October 27, 1972, wh.ich exempts foreign tourists from payment of hotel room tax. Section 1 of P. D. No. 31, provides thus - "Sec. 1.- . Foreign tourists a nd travelers shall be exempt. from payment of any a nd all hotel room tax for the entire period of. their stay in the countr~." Unmistakably etched in the aforequoted provision . of law is the spirit and principle that hotel room charges paid by tourists are entirely exempt from tax. The exempt i o n from hotel room tax is part of that effort of Governme nt to promote Philippin~ travel and tourism by encouraging tourists and other travelers from around the world to come and visit the country. 3 2d

DECISION - CTA CASE NO. 3111 -8 - In this wise, the Philippine s earns much needed dollars. The law had provided the proper incentive to induce foreigners to travel to the Philippines by lowering the costs of the t:.ourists 1 stay in the Philippines. In the end result:., the Philippi nes sh~ll ben~fit in terms of dollars earned by the expenses of these foreigners boosting our dollar reserves. Secondll, petitioner is of the belief that since the money for room charges paid to the hotels were held in trust by it for the foreign tr ave l agencies, it never realized any income therefrom. Tha.se amounts entrusted to it for payment of the hotel room charges, ver i ly, do not form part of its taxable gross receipts as it was held in trust for the benefit of the overseas tour agen c ies and/or the touris~or travelers. On the ather hand, respondent Commissioner of In- ternal fe!e nue, in his Memorandum dated July 25, 1983, insisted that the 3% contractor's tax is imposable on the gross receipts, which i ncluded the amounts that we re entrusted to pet.it.ione�r by foreign tourists and travede�rs and foreign trave l agencies, with which to pay the hotel room charges on the grounds (l) .that petitioner had failed to present any written agreement between the tourists and �the pe titi oner concerning the payment. of hotel room charges and, hence, there is no way of 32 ~

DECISION - CTA CASE NO. 3111 - 9- determining what portion of the amount r emitted by tourists to petitioner was allegedly earmarked for hote l room charges much less the amount actually paid by� petitioner to the hotels; (2) .assuming, but not a d mitting, that part of the amounts or .money received from tourists and foreign tourists agencies were in- deed earmarked to pay. hote~ charges, in the a bsence of law or regulation mandating, such amounts are not e xcluded from the taxable gross receipts; and (3) _that Presidential Decree No. 31 has no relevance to the r esolution of the issue. In a dd ' tion to \his, he cited a per t inent portion o f BIR Ruling No. 68-027 dated October 23, 1968, which implements Section 191 (now S e cti on 205 ) ?f the National Internal Reven~e Code stating that 11 the 3% co nt ractor's tax prescribe d bY. Sec ti_sn 191 of the Tax Code is imposed on the g r oss receipts of the contr actor, no deduction whatever be i ng allowed by said law... In other wor d s, I espondent I as se rted that 11 the entire gros s receipts of a taxpayer su bject to the contrac t or'~ tax, undim i nished by any amo unt, form the bais of the tax ... (Respondent's Memorandum, pp, 69, 7 4 , CTA Rec.) However, contrary to fhe contention of respondent, the records show, firstly, in the Examiners' . Work- shee t (Exh. T , Pe 22, BIR Rec, ) ~ tha t from July to 3 3U

DECISION - CTA CASE NO. 311 1 - 10 - December 1976 alone, the following sums made up the hotel room accomodations: July 1976 !ll02,702.97 Aug. 1976 121 , 167.19 Sept. 1976 53,209.6~ !l282,079.77 Oct. 197() !l 71,134.80 Nov. 1976 409,019.17 Dec . 1976 142,761. 55 !l622,915.52 Grand Tota l !l904,995.29 It is not true, the refore, as stated by respondent, that the~e is no evidence proving the amounts earmarked for hotel room charges. Since the BIR ex~m i ners could not have manufactured the above figures representing " advances for hotel room accomodations," these payments must have certainly been t a ken from the records of petitioner, such as the invoices, hotel bills, official receipts and other pertinent documents. Secondly, du r ing the hearing of the instant case on August 20, ~981, the following questions were asked b y respondent's counsel of petitioner (pp. 14-~5, t.s.n., Aug. 20, 1981; See Exhs. Q, U & T, pp. 29,36 CTA rec. , and p . 22 BIR rec., respectively} _thus: "Q. Do you have p r oofs to show that? Do you haye evidence to prove that these t .ourists requested petitioner to pay for . their hotel bill? "A . Yes. "Q. Do you have any ev i dence ? 3 31

DECISION - CTA CASE NO. 3111 - 11 - "A. Ye s. "Q . Where are they? Is this the tour referred to in this in- voice? "A. The 16-day enchantment. "Q. Who is the particular tourist � that this is referred to in this invoice? "A . The specific name�of the tourist? "Q. Yes. Can You tell us the name for this? "A. Although we have the name of the persons we do not talk of the ind i vidual persons. We talk of the name of ~he group because" there are so many persons involved. "Q. Can you tell us how many tourists are involved in this? "A . It says here 23 persons. "Q. 23 person.s ? "A. Yes. "Atty. Agullana: That is all f or the witness . " In the case of Manila Jockey Club Inc. vs. Collector of Internal Revenue, Case No. 292, April 2, 1958, this Court held in its decision that "gross r~ceipts" .refers. to the "total amount of cash received x x x without Including any amount of money that does not go to its funds as its property x x x and "money x x x does not become its property x x x (if it) .is merely held by it for t he economic use or benefit of another". Said the Court of Tax Appeals. "\ 33 2

DECISION - CTA CASE NO . 3111 - 12 - We find the above i nterpr ~ tation of the Secretary of Justice as respect the term "g ross receipts" to be in accord with the in~ tendment of the Tax Code. As dorrectly opined therein, the total amount of cash received by the race track operator (pe t i 1doner herein) as its earning without inc~u d ins any amount �of money that does not go to its funds a s its property should be deemed� i t.s gross receipts, 1 iable to payment. of the arnusemen t tax imp~os.ed ~ection 260 of the Tax Code. It cannot be ga 1nsa id that petitioner. in the course of its operat.ion, may receiv,e, b~� authority of. law or otherwise, money which does not become its prop e~ ty, but is m~rely held by it for the economic use or benefit of another.:. To subject Ee t.it.ion er to t~ payme nt of amusement tax on account. of this latter receipt is unquestionably ~ust and not contemplated by said sectdon 26.0 of the 'I'ax Code." (Underscoring ours.) ( The above Court of Tax Appeals' decision"was affirmed by the Supreme Court in G.R. No. L-13887, 108 Phil. 821, 826 et seq. Finally, it cannot be said that Preside i1 tial Decree No . 31 is not relevant. to the issue; on the contrary, the hotel room charges of touris~ is exempt from tax in order to induce foreign e rs to visit the: Philippin e s ' and in return our.: country will benefit in t e rms of dollar income. If the hotel room charges entrusted t o petitioner will be subjected to 3% con- t~actor's tax as what respondent would want to do in this case, that would in ~ffect do indirectly what P.O. 31 would not like hotel room charges of foreign tourists to be subjected to hotel room tax. Although, I respondent may claim that the 3% contractor ' s tax is i~po s ed upon a different incidence, i.e. the gross 333

DECI S ION - CTA CASE NO. 3111 - 13 - receipts of petitioner tourist agency which he asserts includes the hotel room charges entrusted to it:., the effect would be to impose a tax, and though different, it nonethele s s impose a tax actually on room charges. One way or the other, it would not:. have the effect of promoting t ourism in ~he Philippines as that would increase the costs or expenses by the addition of a hotel r oom tax in the overall expenses of said t:.ouris~s. Considering the foregoing, we are of the opi n ion and so hold that the money entrusted to petitioner, earmarked and paid fo r hotel room charges of tourists, travelers and/or fore ign travel agencies do not form part:. of the gross receipts of petitioner for the period from 1974 to 1976 subject to the 3% ind e pendent c o n- trac t or's tax �provided in Section 191 (now Section 193) of the Tax Code, as amended. WHEREFORE, the decision of respondent seeking to collec t deficiency 3% contractor's taxes from pe t itioner in the amount of ~122,946.93 for the year 1974 to 1976, is hereby reversed. Without pronouncement as to costs. 334

DECISION - CTA CASE NO. 3111 - 14 - SO ORDERED. 18, 1983. Quezon City, Metro Manila, ANTE crR~UIN ssociate Judge I CONCUR: ~~._b;)... / AMANTE F~~ Presiding Judge Dissents in a separate opinion ALEX z. REYES As soc ia t:.e Judg.e 3 3~

~t.PUI.ILIC O F !H E P HILlPPl :" ES COURT OF TAX APPEALS QUEZON CITY TOURS SPECIALISTS, INC ., Pe~ ti t:i oner , - v er:sus; - C.T.A . CASE NO. 3111 C O~WISSIONER OF INTERNAL REVENUE, Re s.ponden t. X --- ----X DISSENT ING OPI NION I do not in t he case at bar r each the same conclusion. The majority's view would lost the fo ~est f or th e trees by emas�cula ting t he applicable sco pe of th e taxable � 9JlfO SS� r ec:e~ ipts, e�ncomp ass e~d in a "p ac:kage fee" whic:h we:l l c:ompreh e~nds , amon9 oth e rs, hotel ac:comodation of the tour is.ts as; in te:g1ral p�a rt of the " pac:kag;e tou.r" servic:ed by pe titi oner c:on trac:tor . The " gr.os:s; re:c:eipts;" contemplated by Section 191 (now Sec:tion 20 5,) _of the Tax Code means; the ac:tual receipts of t he taxpayer undimin i shed by any deduction unless so mandated by law. "Where the law does not provide de duc t- ions fr:om a t axp ayer. ' s taxable gross receipts he canno t do s.o withou t vio lating the provision s of lat-1 its.elf desp i t e' plausible reasons therefor ." (Campania Mariti ma v. Ac�tg1. Commis.sione:r. of Int~rnal Revenue, ~TA Case No . 1 4 7G, November 14, 1966) �. yn the cite d Manila Jockey Club case, i t was by virtue of. Executive Order No. 320 and R.A . No. 309 that the money set aside for the bonuses 33G

DiaENTING OPINION - CTA CASE NO. 31 11 - 2- of the jockeys and prizes f or borseowners was properly excluded from the taxab le g r o s s rece ipts of the Club . (G . R. Nos. L- 13890 & L-13887, June 30, 1960). But, the "situation thus. diffe~s f r om one i n vJhich the \'mer of the amusement place, by pri vrate contract� Y.tith its employees or partner s, ag:re�es to reserve for the�m a portion of the proce�eds of the establishmen~." (Wong & Lee v. Coll ., G. R. L-101 55, Au gust 30 , 19 5 8~ Sy Chuico v. Coll. , G.R . L-13387, Mar ch 28, 1960~ c ited in Manila Jockey Club, supra) ~ Peti tioner's case is of s uch a mold which l acked the le�gal cognizance authorizing the culling of its actual gro ss. receipts. Towards add ing t~ a further justification pe t itioner would lean on the underlying policy of P.D . No. 31 entitling foreign tourists paying in acceptable foreign currency a t a x. exemption on the hotel occ:upancy charges. The privile9e is es.sentially addressed to the tourists for their availment. But separate and distinct i s the 3% c on tractors tax dir ectly imposed a nd collectible on the gross ~eceipts of one exercising th e privilege of a Tour Operator/Travel Agen cy but wh ich petitioner seems unw illing to take res:pons.i b ili ties or simply unable to discern what they are. It is too much of a . stretch to hold that such a kind of asses.smen t would foreclose the growth and dev�elopme nt of touri'sm and frustrate the sharply defined objectives of the l aw . The tax im�posi tion 33 '?

DISSENTING OPINION - CTA CASE NO. 3111 - 3- sou9h t to be exempted af fec:ts not alone the petitioner but all others similarly situated which much bear a share of the common burden towards meeting the broader commit- ment of the nation 's welfare. It takes more than the asserted deficiency to attain a mean ingi'ul progres.s in the country's tou rist industry. A kingdom lost for want of a nail, f ur be itl I hold that the respondent Commissioner of I nternal Revenue contravened no law and in fact no ne of his own rules in his demand for payment of pe titioner ' s defi- ciency percentage tax. 338