CTA Case No. 2815 (Decision)

~� RRPUBUC OF HIE. rrt!UPP!NE& COURT OF TAX APPEAJ.e:; QUitZON ClTY SPECIAL SERVICES CORPORATION, Petitioner, - versus - C.T.A . CASE NO . 2815 THE COVl!J!ISSIONER OF IN 'rERNAL REVENUE, Respondent. X- - - - - - - - - - - - - X DE C I S I 0 N Petitioner Special Services Corporation appealed to this Court from the determination by respondent Commissioner of Internal Revenue of deficiency con- tractor's percentage and fixed taxes for the year 1965 in t he sum of P61 , 323.69, i 1 elusive of surcharge of 75%, plus compromise penalties for late payment in the amount of P320.00. The basic issue relates to the liability of petitioner to the percentage and fixed taxes as an .' independent contractor on fees allegedly deri ved from management services during the year 1965. While dis- claiming liability thereto, petitioner however raises the defense of prescription, contending that respon- dent's right to issue the assessment in question was already time-barred. The initial and pivotal question therefore to be resolved in this appeal , before going into t he merits of the controversy, is whether or not the right of respondent to assess has prescribed. 13:}

DECISION - CTA CASE NO. 2815 - 2- The records reveal that petitioner is a corpo- ration existing under and by virtue of the laws of the Philippines , with office and postal address at Insular Life Building, Ayala Avenue , Makati , Rizal . During the year 1 965 it derived income from manage- ment service, lea si ng office ~uipment , data processi n g , agency placement and tuition fees. On May 1 3, 19 71, petitioner received from r esponden t's the n Revenue Regio n No . 6 ( now Revenue Region 4-B ) ~ Quezon City , a demand letter dated April 12, 1971 assessing and demanding from i t alleged 1965 deficiency con trac tor's and fixed taxes , inclusive of sur charge, computed as follows: Total taxable sales/receipts per field audit - ~ - - - 1?1,167 , 689.31 3% tax due ther eon - ~ ~ 35,030 . 68 Less : Tax already paid - - - - - --:=-=3-5-,,.0,,3..0,-.-6=8- Defic iency tax due - ~ - - - 75% surcharge thereon - - - - - - 26,273.01 Fixed Tax (PTR) C-4 .(53) 20.00 TOTAL ~10UNT DUE. - - - - � - - 61,303 . 69* I n addition , petit i oner was requested to pay the amounts of P20.0 0 a nd P300 . 00 as compromise penalties fo r alleged late payment of fixed tax ( PTR } and percen - tage tax, respectively. It appea rs that the basis of the assessment was the recommendation of senior revenue examiner Rafael *-TOtal should read P61,323.69 . ~ ") I ...l �.) �Jl

DECISION - CTA CASE NO . 2815 - 3- Verendia, after examining and investigating peti- tioner's income and business tax liabilities for 1965, that the taxpaye r be subjected to deficiency income tax, as we~l as to percentage and fixed taxes as an independe nt contractor, on its gross income of Pl,859,519.69 less equipment rental income of P691,830.38, or on the amount of Pl,l67,689.31, which is considered as the taxable "gross receipts." While the then head of the income tax unit of the Quezon City Revenue Regio n Benjamin M. Bactad recommended, after reviewing the findings of examiner Verendia, the assessment in question with the modification that the surcharge was increased from 25 % to 75%, the proposed income tax assessment , upon his advice , was dropped. The records show that on May 24, 1971~ after eleven (11) days from petitioner's receipt of the assessment, its auditors disputed the said assessment on the merits and on the ground of prescription, by filing a written protest with respondent. However, on April 10, 1976 respondent, without categorically deciding petitioner' s protest , caused to be filed in the Court of First Instance of Manila Civil Case No . 101999 for collection of the amount assessed . After summons with a copy of the verified complaint were served on - petitioner on May 10 , 1976, it filed a

DECISION CTA CASE NO. 2815 - 4- motion to dismiss the case, which motion is ~ill pending before the Court of F:irst Instance of f'.-1anila . With the institution of such action for collec- tion of the taxes assessed against petitioner at the instance of respondent, pe titioner appealed to this Court, raising, besides the illegality .of the assess- ment, the defense of prescription of the right of respondent to make the said assessment. Has the rig ht of respondent t o issue the assess- ment in q uestion barred by prescriptio0? Respondent does not quarrel with petitioner that the assessment under consideration was issued by him beyond the five -year period prescribed unde r Section 331 of the National Inter na l Revenue Code then in force , which reads as follows: "SEC. 331. Peri~of limitati.s;>.!}..~J20n a~sessment and collection. - Except as p r o- vided in the succeeding section, internal revenue taxes shall be assessed within five years after the return was filed , and no proceeding in court without assessment for the collec tion of such taxes shall be begun after the expiration of such period. For the purposes of this section a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day: Provided , That this limitation shall not apply to cases already investigated prior to the approval of this Code ." The assessment for alleged 1965 deficiency contractor ' s tax, 1965 fixed tax, surcharge and compromise penalties bears the date April 12, 1971. It was registered and 13C

DECISION - CTA CASE NO. 2815 - 5- deposited in the mails in Cubao, Quezon City, on Ma y 7, 1971. Since respondent had up to January 20 , 1971 within which to issue his defici e nc y assessment for the contractor's tax for 1965 unde r Section 331, and for purposes of the prescript ive period , an assess- ment is dee med made when the notice is released, mailed or s e nt by the Commissioner of Internal Revenue to the taxpayer (Republic vs. Alano , L-18865 , September 28 , 1964, 12 SC RA 24; Nava vs. Collector of Internal Re v enue, L- 19470 , January 30, 1965, 13 SCRA 104 ; Basilan Estates vs. Commissioner of Int e rnal Revenue , L-22 492, Se p tember 5, 1967, 21 SC RA 17) ~ it seems clear bey ond doubt that the a sses s me nt in q ue stion wa s iss ued beyond the f ive - year pe riod pr escribe d under Sectio n 331 . Conte nding , however, that "pe titioner did not file its perce ntage tax returns as reporte d by the examiner who investigated this case " , respondent "submits that it is Section 332 (now Section 319) of the Tax Code which should apply in this particular case ." (p. 92 , CTA records.) Th e pe rtin e nt provision of said section reads as follows : "S EC . 33 2 . Exc e ption s as to ~iod of limitation of asse s sme nt an d coll e ction of t axes . - (a) In t he case o f a f alse or i raudulent r~turn with intent to evade tax or of a fai l ure t o file a return , the tax may be assessed, or a procee ding i n court for the collection of such ta x ma y be begun without asse s sment , at a nytime within ten years after the di s cove r y o f the falsit y , fraud or omission."

DECISION - CTA CASE NO. 2815 - 6- II (b) X X X X X X II (C) X X X X X x" Thus, 1n his answer to the petition for revie 1'1 , respondent alleges by way of special and affirmative defenses to petitioner's averment that "respondent ' s assessment is barred by prescription and is , there- fore , entirely null and void" that: (pars. 13 & 14, Answer , p. 32, CTA records.) "13. Petitioner c1id not f ile any return for percen t age tax purposes pursuant to Section 183 1n relation to Section 191 of the Tax Code; and 14. As the omission to file the retu rn was discovered on June 8, 1970, the respon- den t has up to June , 1980 within which to make an assessment; consequen tly , the respon- dent's right to assess in this case has not prescribed as the assessment was i ssued on April 12 , 1971, clearly within the period of limitation; and by way of " The question as presented by respondent is, therefore, whethe r petitioner f iled its 1965 percen- tage tax returns as a contractor pursuant to Section 183 in relation to Section 191 of the National Internal Revenue Code then in force. Contrary to the contention and allegations of respondent, the evidence on record, both oral and documentar y , definitely and clea rly show that peti- tioner had f iled its monthly percentage tax r eturns for 1965 pursuant to Section 183 in relation to Section 191 of the former Revenue Code (Exhibits "GG ", '1 .J, 00

DECISION - CTA CASE NO. 2815 - 7- "DD", "BB", "Y", "v'J 11 , T 11 11 "Q", "N", "K-�2" and "G", , Petitioner's Fo lder of Exhibits)~ and had paid the annual privilege tax receipt of contractor, one as " prin ter " under Schedule C-4.-20 and another as "business agent" under Schedule C-4-52 (Exhs. "C" & "D 11 Petitioner 's , Folder of Exhibits ) ~ As a matter of fact, for these two activities which petitioner considered itself as subject to the 3% contractor's tax, it paid the corres- pending monthly percentage tax based on its actual gross receipts as "printer" and as "business agent" . ( t.s.n. , pp. 49-51, hearing of November 10, 1978; Exh . " F", Pe titioner ' s Folder of Exhibits.) All of these paymen ts of taxes , which were made within the time prescribed by law , were duly documented with the corres- pending revenue official receipts, xerox copies of which were admitted as evidence without objection of re spondent after comparison with the originals during the hearing of the case . E 11 11 11 H", 11 1" , "J" , " K11 , , ( " L M R" , " s u" , v " , X z AA p " , " II , II " II , " () II , II II , " II II , II II , II II , "C C 11 , EE FF 11 & 11 11 11 Petitioner's Folder of Exh ibits.) , Absent proof , or even allegation , that the 1965 returns filed by petitioner for contractor's percentage t ax purposes pursuant to Se ction 183 in relation to Section 191 of the Revenue Code then in force we re false or fraudulent, it is thus abundantly clear , in the face of the indubitable fact that petitioner had 13!J

DECISION - CTA CASE NO. 2815 -8 - actually filed returns and paid both the percentage and fixed taxes due from it in the year 1965, that respon- dent's right to issue the assessment in question is barred by prescription, in accordance with Section 331 of the Code. Never the less , respondent al l eges under paragraph �12 of his answer that "petitioner in 1965 was engaged in the business of, among others, rendering management se r vices , taxable under Section 191 of the Tax Code; hence, petitioner is an independent contractor li able for 3% contructor ' s; tax." ~'Jas the omission or failure of petitioner to include in the returns its rece i p t s from rendering management services muke such returns false , so that the Government was prevented from assessing the proper tax liabili ties of petit ioner und , therefore, respondent has ten (10) years from discovery of such omission or falsity to assess , pursuant to Section 322 of the Code then in force? As earlier stated, petitioner during the year 1965 derived income from management service, l easing office equipment , data processing , ag e ncy placement and tuition fees . Petitioner, as has already been demonstra t ed ubove, actually f iled returns and paid both the fixed and percentage taxes on the businesses of "printer " and "business agent", in accordance with the first paragraph of Section 191 of the former Revenue Code. t �'1 0

DEC ISION - CTA CASE NO. 28 15 -9 - Equipment leasing in 1965 was not yet subject to the contractor's tax. On its data processi n g , peti tion e r pa id the contractor's tax as "printer" for t he re a son that part of the wo rk involved was submission to clients of "printed reports" processed by the computer. (t . s . n . , p. 15, hearing on Nov embe r 10, 1978.) And as to the " agency commission income" and "placement and tuition fees " (exc luding tuit ion fees),_ petitioner paid the contracto r' s tax as emp loyment ~gency . ( t . s. n. , pp . 15- 16, hearing on November 10, 197 8 ; see a l so Se ction l94(v) of the Nationa l Internal Revenue Code the n in forc e . ) Wi th r espe ct to th e manag e ment se rvice fees , the service furnished by pet itioner unde r thi s activity a re as follows : ( pp . 65 & 98, CTA records .) "1. To furnish t echnical guidance on labor and union r e lations , collective bargainings ; " 2. To standardi ze personne l pr ocedures, job and pe rsonnel eva l uation methods ; "3. To undertake studies in work organ- ization, work flow, and work simplif ication; "4. To maintain a system of form improvement p rogram; "5. To plan and implement p r omot ional undertakings a nd pu blic relations, etc." \\T hile respondent ad mi ts that " pe titioner ' s income from management servic e fees does not fall unde r any of t he activities ment ioned from Nos . (1) t o (17) ". o f Secti on 191 of the Tax Code th en in force ( p . 98, CTA r ec ords) ~ -t 1 I. .... ' ..L

DECISION - CTA CASE NO. 2815 - 10 - he contends that the above unde rtakings or services render ed by petitioner fall wi thin the classification of "other indepe ndent contracto rs" unde r paragraph (18) of Sec ti on 191 and , therefore, subject to 3% contrac tor' s tax provided therein (p. 99 , CTA records) . For its income or gross receipts derived frDm management ser- vices as specified above, is peti tioner liable to pay 3% contractor ' s tax as " independent contractor" within th e purview of Section 191 of the then Nat ional Inter nal Revenue Code? Indeed, the question i s not one of fi r st impression . In Stock Transfer Service, Inc . vs. Commissioner o f Interna l Revenue, CTA Case No. 2003 , July 29, 1971, cer t~or ari denied i n L- 3 4582 , January 25, 197 2 , whe rein the issue involved is whether a trans f er agent whose business consists of registering tra nsfers and issuance ot certificates of stocks is an "independent contrac t or" within the purview of Section 191 of the National Internal Revenue Code then in force a nd , hence , liabl e t o pay fixed and percentage t axes , this Court une qu i- vocally ruled that the term "other independent con- tractors " at the end of the enumerat ion of persons who are subj e ct to the c on tractor ' s t ax should include only those who are engaged in businesses similar to those enumerated. Because of its controlling effects on the question under consi der ation, we will quote 1 .! 1<-:\, 'i

DECISION - CTA CASE NO. 2815 - 11 - a t length from the decision: Section 191 of the Revenue Code enumerates the kinds of contractors who are subject to tax and adds to the list "other independent con- . tractors. " The allegation of responden t that the addition of "other independent contractors " to the list is intended "to include al l persons whose activity consists essentially of t he sale of all kinds of services for a fee ��� r egardless as to whether or not the performance of wh ic :1 calls for the exercise or use of the mental or physical or manual faculties of its employee or employees " is unwarranted . It is a settled r ule of statutory construction that where general words follow the designation of particular things or classes of persons or subjects , the general words are to be con s - trued as including only the persons or sub- jects of the same class or general nature as those specifically enumerated . This i s a rule of statutory construction known as ejusdem generjs . (Ollada v . C.T. A., 99 Phil. 6 04, citing Crawford , The Con str uction of Statutes , pp . 326-327 . ) 1-Jhen Congress added "other independent contractors" at the end of the enumeration of the persons who are subject to the contractor ' s tax , the same should be construed to include only those who are engaged in businesses similar to thos e enu- merated. X X X X The argument that the addition of "other independent contractors " to the list of busi- nesses taxable under Section 191 was i nte nded to tax any and all independent contr actors is not justified by the wording of the l aw . It will be noted that the term "other independent contractors " Has added to the list of taxable businesses under Section 191 of the Revenue Code by Section ll of Republic Act No . 1 6 1 2 , which became effective on August 24, 195 6. Said amendatory Act added the following busi- nesses to those previously ta xable under Section 191 , along with "othe r independent contractors ": (l) demolition and sa lvage work contractors ; (2 ) ar rastr e contractors; (3) persons selling water; (4) plastic lamination establishments; (5) �vulcanizing "1 l .0 , ' i.

DECISION CTA CASE NO . 2815 - 12 - and recapping establishments ; (6) establish- ments for washing and/or greasing of motor vehicles; (7) battery charging; (8) planing or surfacing and recutting of lumber; . (9) saw- mil.ls under contract to saw and/or cut logi belonging to others; (10) laundries using washing machines; (11) shoe repairing by machine or any mechanic~l contrivance; and (12) business agents . If, as alleged, Congiess intended to tax all independent contractors irrespective of the na ture or kind of the business engaged in, there was absolutely i!O need fo r the addition of the twelve businesses mentioned above. That Congress saw fit to add particular kinds of businesses to the taxable list along with "other independent contractors" is an eloquent proof that it was intended to limit the appli- cation of the general words to businesses of the same kind and category as those enuma:ated . X X X X (Se e also Philippine Psychological Corporation v. Commissioner of Intern a l Revenue , C.T . A. Case No . 2 3 2 9 , Oct. 2 9 , 19 7 5) .. Inasmuch as the activity of petitioner designated as "management service" is not one of those specifically enumerated in Section 191 of the Reve nue Code then in force, nor one "similar to those enumerated ," peti- tioner did not fall within the classification of "other independent contractors" subject to 3% con- tractor~ tax prov id ed therein. According ly, petitioner was not required to include in its percentage tax returns the income or gross receipts de rived from management services rendered in 1965 and pay fixed and percentage taxes as "inde pendent contractor. " It can never be said , ther efore , that because of peti- tioner's omission to include in its returns in 196 5

DECISION - CTA CASE NO. 28 15 - 13 - its receipts from rendering management services, the Government was placed at a disadvantage so as its lawful agents were prevented from proper assessment of petitioner's tax liabilities due to false returns. Nothing had been omitted,with intent to escape tax, from the 1965 monthly percentage tax returns of petitioner whereby the Government had been defrauded of its lawful revenue from the management service fees as provided under Section 191 of the Tax Code . It necessa rily follows that the ordinary period of prescription o f five (5) _years within which respondent can assess under Section 331, supra, should be applicable. Having reached the result that the right of respondent Commissioner of Internal Revenue to assess petitioner Specia l Services Corporation deficiency contractor's perce n ~ ~ ge and fixed ta xes for the year 1965 in the sum of ~61,323.69, inclusive of surcharge , plus compromise penalties in the amount of ~320 . 00 , has prescribed, there is consequen tly no deficiency of said taxes . If the assessment or collection of any tax is barred by any statute of limitations, the decision of the Court to that effect shall be considered as its decision that there is no deficiency in respect of such tax. (S ec . 14 , Republic Act No . 1125 . ) WHEREFORE, respondent's assessment subject of this proceeding is hereby declared invalid and of 1 1 r~ ".i'.. J

.. DECISION - CTA CASE NO . 28 15 - 14 - no effect . Without pronouncement as to costs. SO ORD_E, IU::D . Quezon City, Metro Manila, May 22 , 1980 . ~~~ Ac t ing Pres 1ding Judge I CONCUH :