CTA Case No. 5691 (Decision)

REPUBLIC OFTHE PHILIPPINES COURT OFTAX APPEALS QUEZON C ITY TRUS1WORTHY PA,VNSHOP, INC., C.T.A. CASE NO. 5691 Petitioner, \ -versus- COLLECTOR OF INTERNAL Promu'lgated: _MAH 0 7 20 0 REVENUE, Respondent. x ------- ------ - - ---------------------- ------ - - - - - - - - - - - -- - . DECISION This case emanates from an assessment dated June 13, E197 issued against Petitioner in the amount of P2,108,335.19 representing deficiency per .;entage tax for the year 1994. Petitioner is a domestic corporation duly engaged in the bus.ness of pawnshop business. By virtue of Revenue Memorandum Order (RMO) No. 15-1') dated March 11, 1991 and Revenue l\.1emorandum Circular (RMC) 43-91 dated May 27, 1991, which provide that "the pawnshop business is akin to the Lending Investor'. business activity" and should therefore be assessed the 5% percentage taxes being imposed upon Lending Investors", a demand letter and assessment notice bearing number S1-PT-13-94-97-6- 073, both dated June 13, 1997, were issued by the Chief of the Asse ;sment Division of Revenue Region No. 7 of Cebu City assessing Petitioner for deficiencv percentage tax in the amount of P2,108,335.19, inclusive of surcharges and interest, covering the year 1994. In addition to said amount was a compromise penalty of P93,00 lOO. Consequently, Petitioner filed an administrative protest Jnd!or motion for reconsideration on Julv 4. 1997. on the grounds that:

DECISION C.T.A. CASE NO. 5691 - 2- I. There is no specific provision in either the Tax Cock or the VAT Law which expressly imposes on pawnshops the 5o tax on its gross income; II. Pawnshops are widely different from lending in' estors which are subject to the 5% tax on gross income under the specific provision of the Tax Law; III. Revenue Memorandum Order No. 15-91 (R1vl0 15-91) elated March 11, 1991 is no implementing any particular provision c f the internal revenue laws, but is in fact a new and additional tax measure oo pawnshops, which only Congress may enact; IV. RMO No. 15-91 is a taxation by implication that in1pliedly amends the Tax Law and which is proscribed by law; and V. R1vl0 No. 15-91 which singles out pawn<;hops among other lending and fmancial operations partakes of a ''class legislatiojl". The above protest having remained unactecl, Petitioner eleva ted the issue to the Commissioner oflntemal Revenue on March 16, 1998. In its petition for review as well as in its memorandum, Petitioner alleges that the inaction of the Commissioner prompted it to appeal to the Comt of T :.x Appeals pursuant to Section 228 of Republic Act No. 8424, othetwise known as the Tax Refotm Act of 1997, to wit: "If the protest is denied in whole or in part, or is not acted upon within one hundred eigl1ty (180) days fi:om submission of documents, the taxpayer adversely affected by the decision or inaction may Jppeal to the Court of Tax Appeals within thirty (30) days from receip1 of the said decision, or from the lapse of the one hundred eigl1ty (180)-day period,; othetwise, the decision shall become fmal, executory and demandable". In fact, Petitioner claims that i t had seasonable filed the instant petition on September 15, 1998. Considering that the one hundred eighty days lapsed on Septelilber 13, 1998, it had thirty days therefrom or until October 13, 1998 within which to fik its judicial appeaL Thus, the filing on September 15, 1998 with this Court of its appeal was timely.

DECISION C.T.A. CASE NO. 5691 3- However, records indubitably show that the petition was filed only on November 11, 1998 and on September 15, 1998 as alleged. In other words, wav beyond the period allowed by law. If We were to take into account these facts alone, Petitioner's case should be outrightly dismissed. But fortunately for the Petitioner, a wanant of distraint ancVor levy was issued by the Respondent on October 12, 1998 which as per our resolution of March 26, 1999, constituted a fmal decision of denial on Petition�.-:r's protest. by the Commissioner (CTA rec., p. 64). Further, Our deciding the case at bar on the merits is in consonance with Our mling in the case of Lascona Land Co., Inc. Yersus Commissioner of Intemal Revenue, et al., CTA Case No. 5777, January 4, 2000, that in cases of inaction, Section 228 of the Tax Code gives the taxpayer an option t<; appeal to Us within thit.ty days from the lapse of one hundred eighty clay or to wait for rositive action on the patt of the Commissioner even after the lapse of said period, without the assessment becoming fmal, executory and demandable. Accordingly, the said watTant being equivalent to a final decision of the Commissioner, Petitioner had thirty clays therefrom to appeal to Us. The ftling therefore of the petition on November 11, 1>98 was timely albeit on the wrong premise. Petitioner is however admonished to be v. ll conversant of its facts and laws. Tllis case involves pure questions of law for which reason cespondent opted to submit the case for decision based on the pleadings. Petitioner vehemently argues that pawnshops are not lending investors, hence, not subject to 5<% percentage tax. Respondent, however, sees the matter differently, contending that the legal defmition of "lending investors" (Section 157(u) of the Tax Code), is broad enough to include pawnshop operators.

DECISION C.T.A. CASE NO. 5691 - 4- Petitioner also maintains that RNIO No. 15-91 and RVIC 43-91 are not implementing mles but are new and additional tax measures whi h only Congress is empowered to impose. Besides, Petitioner posits, the said regulations are invalid due to the absence of publication. However, Respondent expounds that I:lviO No. 15-91 and RMC 43-91 are mlings which expressly revoke previous mling implementing then Sections 116 and 157(u) of the Tax Code that pawnshops are not subject to 5�o lending investor's tax. Such revocation is authorized under Section 246 of th(; Tax Code.. The sole issue subject of herein controversy is whether or not Petitioner, as a pawnshop operator is a lending investor under Section 157(u) of the Tax Code, as amended, to be liable for 5% deficiency percentage taxes in the sum :)fP2,108,335.19 for the year 1994. We mle in favor of the Petitioner. The disputed provisions of the Tax Code (1986) are hereunde�� quoted: Sec. 157. \Vonls and Phrases defined. - X..\.X (u) ''Lending investor" includes all persons �who mal.:e a practice of lending money for themselves or others at interest. Sec. 161. Fixed Taxes. - X..\X (3) Other fixed taxes. - X-\.X (del) Lending investors - 1. In chartered cities and first class municipalities, one thousand pesos. 2. In second and third class municipaiities, five humh ed pesos; fifth 3. In fourth and class municipalities and munic pal districts, two hundred fifty pesos: Provided, That lending inveswrs who do business as such in more than one province shall pay (.� tax of one thousand pesos. J09

DECISION C.T.A. CASE NO. 5691 5- XXX XXX XX. X (ff) Pm1mshops, one thousand pesos. XXX x.xx Sec. 175. Percentage tax on dealers in securities, lending investors. -Dealers in securities shall pay a tax: equivalent to .,�ix (6%)-per cent oftheir gross income. Lending investors shall pay a tax equivalent to five (5%) per cent oftheir gross income. (Fonnerly Section 116.) Pertinent provisions of Presidential Decree 114 (Pawnshop F.egulatory Act) are likewise cited, to wit: Sec. 3. Definitions. - As used in this Decree, unless the context othetwise requires, the following tetms shall have the following meanings: "Pawnshop" shall refer to a person or entity enga:ied in the business of lending money on personal properly delivered as :;ecurity for loans and shall be synonymous, and may be used interchang-ably, with pawnbroker or pawnbrokerage. XXX X.'\X X.'\X Sec. 10. Rates of interest - No pawnshop shall ,[irectly or indirectly stipulate, charge, demand, take or receive any higlter rate or greater sum or value for any loan or forbearance than the rate ;11lowed by the Usury Law for such transactions. xxx Based on the above proviso, it would appear that the position of Respondent that pawnshops are lending investors is well grounded, inasmuch as the principal business ------ activity of the pawnshop is lending money at interest. The accptar ce of a pawn of personal property as security for the loan is tnerely incidental thereto. That is why, relying on his authority under Sections 245 and 246 of the Tax Code, as amended, to make rulings or opinions in connection with the implementation of the provisions thereof and to revoke, modify or reverse the same, Respondent officially

DECISION C.T.A. CASE NO. 5691 - 6- revoked BIR Ruling No. 06-90, VAT Ruling Nos. 067-90, 022� 90 which exempted pawnshops from the 5% lending investor's tax by issuing RlviO No. 15-91 and Rl'vlC No. 43-91, respectively quotec viz: "A restudy of P.D. 114 shows that the principal acttv1ty of pawnshops is lending money at interest and incidentally .tccepting as 'pawn' of personal property delivered by the pawner to the pawnee as security for the loan. Clearly, this makes pawnshop business akin to lending investor's bu.,iness activity which is broad enough tc� encompass the business of lending money at interest by any person whetbr natural or juridicaL Such being the case, pawnshops shall be subjec; to the 5% lending investor's tax based on their gross income pursuant to Section 116 of the Tax Code, as amended". This Circular subjects to the 5% lending investor's t;.;x the gross income of pawnshops pursuant to Section 116 of the Tax Code, it thus revokes BIR Ruling Nos. 6-90, and VAT Ruling Nos. 22-90 and 67-90. In order to have a uniform cut-off date, avoid unfairness on the part of the taxpayers if they are required to pay the tax on past transactiom, and so as to give meaning to the express provisions of Section 246 of the: Tax Code, pawnshop owners or operators shall become liable to the lendi11 g investor's tax on their gross income beginning January 1, 1991. Since t:1e deadline for the filing of percentage tax on lending investors coverir.g the flrst calendar quat1er of 1991 has ah�eady lapsed, taxpayers are given up to June 30, 1991 within which to pay the said tax without penalty. I::' the tax is paid after June 30, 1991, the corresponding penalties shall be assessed and computed from April21, 1991. "Since pawnshops are considered as lending investor:; effective January 1, 1991, they also become subject to documentary sLlmp taxes prescribed in Title VII of the Tax Code, BIR Ruling No. 325-88 dated July 13, 1988 is hereby revoked." However, We do not subscribe to the vtew of the Respo11dent. By clear legislative intent, We fmd pawnshops not subject to the 5% lendi 1g investor's tax provided under Section 116 of the Tax Code, as amende . We are in a situation where to adopt the literal import of the pro' isions of Section 157(u) in relation to Section 116 of the Tax Code, as amended, would lead to plain Jl..t..

DECISION C.T.A. CASE NO. 5691 7- absurdity, injustice, contradiction and impairment of Constitutionaj limitations. For this reason, We are intervreting said provisions according to the principle of ratio legis or spirit or reason of the l aw. Thus: The principle has been variously formulated: "As a t;eneral rule of statutory construction, the spirit or intention of a statute pn..:vails over the letter thereof, and what is within the spirit of a statute is wirhin the statute although it is not within the letter thereof, while that which is viithin the letter but not within the spirit of the statute is not within the statute." [Tanada vs. Cuenco, 103 Phil. 1051, 1086 (1957), citing 82 C.J.S. 613] Tile spirit, rather than the letter, of a statute determines the construction thereof and the court looks less to its words and more to its context, subject matteJ, consequence and effect. [Manila Race Horse Trainers Assn., Inc. vs. De la Fuente, 88 Phil. 60 (1951); Go Chi vs. Go Cho, 96 Phil. 622 (1955)] A statute must be read according to its spirit and intent, and where the legislative intent apparently conflicts with the l etter of the law, the fonner prevails over the latter. [Tanada vs. Cuenco, 103 Phil. 1051 (1957); Hidalgo vs. Hidalgo, G.R No. 25326, May 29, 1970, 33 SCRJ..\ 105 (1970); Roa vs. Commissioner of Customs, 23 Phil. 315 (1912)] (All citations taken from the book: Statutory Construction by Agpalo, 3rd ed., 1995) If \Ve go by the contention that pawnshops are lending investxs, then Congr ess would not have been mistaken in treating the two separately under p:u�agraphs (dd) and (jj) of Section 161 of the Ta'{ Code, as amended, supra. Logic simply dictates that if by prior definition under Section 157 (u) of said Code pawnshops and lending investors are of the same class, then there is no rational basis for di:fef rentiatirlf; them under one heading later, except for the fact that they are dissimilar as tax subjects. Further analyzir1g said Section 161, supra, it appears that lendi.1g investors were imposed a graduated type of frxed taxes depending on the class of the ciry or municipality involved while pawnshops were differently levied a flat amount of ta::. This pmticular observation bolster Our position that pawnshops are not similarly simated as lending investors. Congress would not have intended otherwise, because the act of segregating v' 1 ..!.. �, '"-

DECISION C.T.A. CASE NO. 5691 - 8- and ifnposing upon them unequal amount of taxes would transgres:; the fundamentalmle on taxation on uniformity or equality enslu�ined under par. 1, Sectit m 28 of A11icle VI of our Constitution. The mle requires that all subjects or objects of taxation, similarly situated, are to be treated alike or put on equal footing both in pr:vileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371) It has also been inteqJreted to mean that all taxable articles or kinds of properly of the same clas-; shall be t axed at the same rate (City ofBaguio vs. de Leon, 25 SCRA 938). Veli.ly, Ccngress is presumed to have acted in full knowledge of this particular constitutional limitmion when it classified pawnshops apart from lending investors. In the same vein, We take note of the fact that there are additional provisions of the Tax Code, as amended, which treats of other persons or entities also engaged in the practice of lending money at interest differently from a lending investor. We are refening to banks, non-bank financial intermediaries and fmance c ompanies who are in the lending business eaming interest too, yet, are classified separately and imposed a graduated type of rate of taxes (5%, 3%, 1% & 0%) under Sections 119 and 120 of said Code. Again, if \\Te go by defmition and themle on uniformity, banl:s, non-bank fmancial intetmediaries and fmance companies are supposed to be simply imposed a tax rate of sg,�& on their gross income becauc;;e they do meet the criteria of what a lee1ding investor should be. The fact shows, however, that they are treated differently. Nloreover, both Sections 119 and 120 of the Tax Code, as amended, catTy a proviso granting the Commissioner of the Bureau of Intemal Revenue of tbe right to impose the same taxes on persons petforming similar banking or fmancing acti' ities, as the case may be, while Section 116 of the same Code governing lending investors has none of the same. If the legislature intended to include other persons or entitic s engaged in similar J13

DECISION C.T.A. CASE NO. 5691 9- lending activities, such as pawnshops, under the term "lending in' eslors", it would have conveniently added the same proviso. In the absence of such proviso, it would seem thus that lending investors are persons or entities of their own class, without any need for the Commissioner to classifY other persons or entities engaged in simil.1r lending activities. What \Ve have presented so far in the preceding discussion succinctly demonstrates the enoneous decision reached by Respondent Commissioner in .Jassifying pawnshops as lending investors subject to the 5% lending investors' tax. lm:vitably, Vle. reach the conclusion that the tetm "lending investor" as defmed in Section J 57(u) should be taken in isolation and should serve no other pmvose than to simply c:arify what a "lending investor" is all about. Indeed, as pointed out by the Petitioner, t[lere is no special law goveming lending investors. Without any legal or dictionary meaning of what a lending investor is, this lexicological vacuum could have very well been tbe sole justification for the existence of said defmition. Even if We assume for the sake of argument that the ;tance of Respondent Commissioner has some support in fact and in law, Our pronour cements herein would still leave so much doubt when the same is put to the cmcible of judicial scmtiny. In this light, the con�ect interpretation should still be in favor of the Petit�oner. As was held in the case of Commissioner of Internal Revenue vs. Firem, n 's Fund Insurance Company, 148 SCRA 315, citing the case of :Manila Railroad Co. v. Collector of Customs, 52 Phil. 950 [1929]), to wit: It is a general mle in the 'inteqJretation of statutes kvying taxes or duties, that in case of doubt, such statutes are to be constmed most strongly against the govemment and in favor of the subjects or citizens, because burdens are not to be imposed, nor presumed to be imposed beyond what statutes expressly and clearly import.

DECISION C.T.A. CASE NO. 5691 - 10- Fmthetmore, Comt of Appeals, in Commissioner oflntemal evenue versu') Hon. Andres B. Reyes, Jr., et al., CA-G.R SP No. 28824, December 23, 1993, held in this w tse: After a careful review of the petltlon and all its annexes, and considering the private respondents' comment filed thereto, We are unable to find merit in the petition for the following reasons: XXX x.x.x XXX TillRD. Revenue Circular Nos. 15-91 and 4::-91 are not implementing mles but are new and additional tax measun s which only Congress is empowered to impose. Section 245 of the Tax Code has limited or confmed petitioner's power to issuing mles and regulation to implement or carry into effect the provision of the c..;ode in the enforcement of taxes provided therein, and petitioner c<:nnot impose additional taxes not provided therein. Under the Constitution, the power to tax is solely vested in Congress. In issuing subject Revenue Circulars imposing new taxes against pawnshop, petitioner anogated unto himself legisl.ttive powers, with grave abuse of discretion and in excess of jurisdiction. FOURTH. Contrary to petitioner's posture, a pawn;hop is not a lending investor, and therefore it is not subject to percentage tax. Pawnshops and their operation are strictly regulated by the Central Bank, pursuant to P.D. 114. The charges and interest rates imposed by pawnshops are prescribed by the Central Bank to protect the client's title. On the other hanc there is no law goveming lending investors and the charges and interest they impose are flexible, not pegged by the Central Bank. In this case, petitioner seeks to justif-y the Revenue Circulars in question on the ground that the business of lending money by the pawnshop is akin to a (sic) lending investors vvho are subject to percentage tax, hence, the pawnshop should also be subjected to percentage tax. This is taxation by implication which is legally prescribed (sic). XXX X-X.-\ FIFTH. x.x.x

DECISION C.T.A. CASE NO. 5691 11 - It is crystal clear that petitioner was without any authority to issue said Revenue Circulars, thereby rendering them null and voic:. WHEREFORE, in view of all the foregoing, the instant petition for review is hereby GRANTED. Revenue Memorandum Order No. 15-91 and Revenue Memorandum Circular No. 43-91, in so far as they classify pa<.vnshops as lending investors subject to 5-o lending investor's tax is hereby declared l\ULL and VOID for being contrary to law and the constitution. Accordingly, AssessmeDt Notice No. 81-PT- 13-94-97-6-73, elated June 13, 1997, is likewise, hereby CANCELLED and SET ASIDE. SO ORDERED. / I .. \N'CioQ AGA r\ssociat Judge WE CONCUR: : J6:L ERN STO D. ACOSTA id dge 10N O. DE . j 1\ Associate Jud CERTIFICATION I hereby certify that the above decision was reached after du..:. consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. Q ERNESTO D. ACOSTA Presiding Judge