HONEST SERVICE PROVIDER, INC. (represented by its Accountant) MELINDA BEJASA v. CITY OF MAKATI

REPUBLIC OF THE PHILrPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION *********** HONEST SERVICE PROVIDERS, C.T.A. AC NO. 40 INC. represented by its Accountant Members: MELINDA BEJASA, Petitioner, -versus- ACOSTA, P.J. BAUTISTA, and CASANOVA, JJ,. CITY OF MAKATI and CITY Promulgated: TREASURER NELIA A. BARLIS, Respondents. X ---------------------------------------------------------- ------- DECISfON ACOSTA, P.J.: This is an appeal by Petition for Revi ew ti�om the Decision of the Regional Trial Court (RTC) of Makati City, Branch 57, dismissing for lack of merit, petitioner's appeal of the assessment for defici ency business taxes, fees and charges issued by respondents; and the Order denyin g petitioner's Motion for Reconsideration The facts of the case, cull ed from the records, follow : Honest Service Providers, Inc. (petitioner) is a domestic corporation duly created and existing under the laws of the Republi c of the Philippines with principal office at 7/F Vemida Condominium, 120 Amorsolo Street, Legazpi Village, 1229

C.T.A. A.C. No. 40 DECISION PAG E 2 Makati City. Petitioner is engaged in providing .ianitorial and messengerial services to clients within Metro Manila and nationwide. Petitioner has been faithfully securing its yea rl y business permit and paying its local taxes due to respondent City of Makati. In January of 2005, when petitioner applied for a renewal of their business permit, the amount due was P817,248.48 which was far different from the previous years' business tax of around P50,000.00. Hence, petitioner was not able to renew its business permit. Due to the above assessment, petitioner' s Accountant and Vice President visited the office of respondent City Treasurer, and they were informed that an examiner will be sent to petitioner's office for the verification of the records. Thereafter, a Letter of Authority No . LA-2006-00 I was issued, authorizing Revenue Examiner Felito A. Manrique to verify the records of petitioner. But instead of conducting an actual examination or verification of records, the Revenue Examiner requested copies of petitioner's Audited Financial Statements for years 2002 up to 2005. On February 27, 2006, petitioner received a copy of the Notice of Assessment dated February 22, 2006 demanding payment of P2,415,509.42 representing deficiency city business taxes, fees and charges for taxable period 2003-2005. On April 11 , 2006, petitioner responded with a written protest requesting for a reconsideration of the assessment, and raising the following arguments: "a. The assessment is oppressive/co nfi scatory and, therefore, violative of the right to due process of the taxpayer; b. The assessment is null and void because the basis of the assessment was not stated in the assessment;

C.T.A. A.C. No. 40 DECISION PAGE3 c. The assessment of the City of Makati fa il ed to consider the taxes paid by the taxpaye r: and d. The assessment failed to consider th e direct costs representing reimbursements of salaries and contributio ns to the Government Agencies and taxes paid ." On April 12, 2006, respondents denied peti tioner' s request for reconsideration, and the latter was given thirty (3 0) days fro m receipt thereof to pay the deficiency taxes, charges and fees or to elevate or appeal the Noti ce of Assessment to a court of competent juri sdiction. Petitioner received respondents ' deni al on April 18, 2006. Consequently, petitioner appea led and fil ed its co mplaint before the Makati City Regional Trial Court (RTC) on May 18. 2006. Its complaint was docketed as Civil Case No. 06-4 10. On November 3, 2006. the RTC rendered its Decision dismi ssing peti tioner' s Appea l for lack of meri t. The Decision partly reads : "And as can be obviously in fe rred from the very definition of the tem1 ' gross sales or receipts', the same includes compensation or service fee, plus the amount charged or materials supplied with the services. Thus, clearl y, the conten ti on of plain tiff that the 'salaries and wages of the janitors and messengers ' and costs of ' cleaning material used for the clients' should not be included in the computation of gross receipts is misplaced. XXX XX X XXX The Court, therefore. find s the subj ect assessments to be valid. The assail ed assess ments against pl ainti ff were the results of the examinati ons undertaken by the Makati City Revenue Examiners under Letters of Authority issued by the City Treasurer. Contrary to the erroneous all egati ons of the pl aintiff, the said assessments are true and correct based on the secured financi al documents of the former. XXX XXX XXX Likewise, it must be emphasized that defendant City of Makati has never deviated from its mandate by law which may cause oppression and violation of the ri ghts of any tax payer, as the plaintiff

C.T.A. A.C. No. 40 DECISION PAGE 4 so claims. The demand for deficiency taxes was just simply that plaintiff was found to have understated its gross sales or receipts as re fl ected in the Official Receipts of the Mayor's business permits for the taxable years covered ; hence, the subj ect assessment." Petitioner filed a Motion for Reconsiderati on of the Decision but was denied in an Order dated July 10, 2007. Hence, the instant Petition for Review fil ed on August 30, 2007, with the following supporting grounds, to quote: I. The Trial Court erred in holding that the sa laries and wages of janitors and messengers and the janitorial cleaning materials used and charged to the clients at cost without any element of pro1~t to petitioner, being direct expenses, are part of gross receipts; II. The Trial Court erred in holding that payments from clients outside the City should be taxed by the City con sidering that it did not perform services to the petitioner. its emJ"lloyees and clients who were assigned/located outside its jurisdiction; III. The Trial Court erred in not holding that th e Notice of Assessment was null and void for failure to state the basis of the assessment and for lack of actual examination of the petitioner's books/records; IV. The Trial Court erred in not holding that the assessment was arbitrary, unreasonable, unfair. baseless. hastil y made resulting to its being oppressive or confi scatory and , th erefore, violative of plaintiffs substantive rights and to due process under the present pro-God and pro-people constitution. In a Resolution dated September 20, 2007. respondents were required to file a Comment. In compliance thereto, respondents fil ed their Comment on October 15, 2007, which was posted on October 5, 2007. On January 7, 2008, the instant case was submitted for decision after considering the parties' Memoranda.

C.T.A. A.C. No. 40 DECISION PAGES On the first ground relied upon by petitioner; a review of the Notice of Assessment sent to petitioner as well as its attached worksheet shows that petitioner is � being assessed of tax as a service contractor. . . The applicable provisions herein are Section 143(e) of the Local. Govern,merit Code (LGC) of 1991 in relation to its Section 151, and Sec. 3A.02(f) of the'Makati Revenue Code, covering contractor's tax. The pertinent portions ofthe provisions are quoted hereunder: SECTION 143. Tax on Business . - The municipality may impose taxes on the following businesses: XXX XXX XXX (e) On contractors and other independent contractors, m accordance with the following schedule: With gross receipts for Amount of Tax the preceding calendar year J>er Annum in the amount of: XXX XXX XXX ARTICLE III CITIES SECTION 151. Scope of Taxing J>owers . - Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges lev ied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this code. The rates of .taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. u'l 2

C.T.i\ . A.C. No. 40 DECISION PAGE6 SEC. 3A.02 Imposition of Tax. - There is hereby levied an annual tax on the fo llowing businesses at rates prescribed therefore: XXX XXX XXX (f) On Contractors and other independen t contractors defined in SEC. JA-01 (q) of Chapter ITl of thi s Code: and on owners or operators o f business establishments rendering or offering services such as; xxx jani torial services ... XXX XXX XXX With gross sales or receiptsfhr the preceding Amount ofTax calendar year in the amount of: Per Annum XXX XXX XXX Apparentl y, contractors are subj ect to busi ness tax and the amount thereof is based on the business ' gross sa les or receipts of the preced in g calendar year. Com-actor is refen ed in the Local Govern men t Code of 1991 as to include persons, natural or juridical, not su~ject to pn?lessional tax under Section 139 ofthis Code -vvhose activity consists essentially ol the sale of a!! kinds of services for a fe e regardless of whether or not the pe1:{ormance of the service calls for the exercise or use of the physical or mental faculties of such contractor or his employees'. The defi ni tion includes any person whether natura l or juridical as long as the activity of such person consists essentially of the sale of services for a fee. Since petitioner ts engaged in the business of providing janitorial and messengerial services to its cli ents in conside ration of a service fee; therefore, it is engaged in rendering services for a fee, whi ch is well within the scope of the above definit ion. Accordingly, petiti oner is subj ect to a contractor's tax based on its gross sales or receipts. 'Section l 3 1(h) t I ''J ~

C.T.A. A.C. No. 40 DECISION PAGE? Being relevant, this Court has to touch on the definition of gross sales or receipts to determine its exact meaning. The Local Government Code of 1991 defines gross receipts or sales as fo ll ows: "Gross Sales or Receipts include the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount chat�ged or materials with the set-vices and deposits or advance payments actually or constructively received during the taxable year for the services performed or to be performed for another person excluding discounts if detenninable at the time of sales, sales return, excise tax, and value-added tax (VAT) paid by the taxpayer." 2 (Emphasis supplied) The definition is clear and unambiguous. Gross Sales or Receipts include the total amount of money representing the service fee. undiminished by costs or expenses and excluding discounts if determinable at the time of sales, sales return, excise tax. and value-added tax (VAT). In other words, "gross receipts" refer to the total, as opposed to the net. These are, therefore, the total receipts before any deduction for the expenses of management3. In fact, in China Banking Corporation v. Court ofAppeals4, the Court defined the term in this wise: "As commonly understood , the term 'gross receipts' means the entire receipts without any deduction. Deducting any amount from the gross receipts changes the result, and the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless the law itself makes an exception. As explained by the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania v. Koppers Company, 2 Section 131 (n) 3 CIR vs. Solidbank Corporation, G.R. No. 148191, November 25, 2003 4 403 SCRA 647-649

C.T.A. A.C . No. 40 DECISION PAGES Inc., hi ghl y refined and technical tax concepts have been developed by the accountant and legal technici an prim aril y because of the impact of fede ral income tax legislation. However, thi s in no way should affect or control the norm al usage of words in the construction of our statutes; and we see nothing that would require us not to include the proceeds here in question in the gross receipts allocation unless statutoril y such inclusion is prohibi ted . Under the ordinary basic methods of handling accounts, the term gross receipts, in the absence of any statutory definition of the term, must be taken to include the whole total gross receipts without any deductions, x x x. '' (Emphasis supplied) However, petitioner posits that the payment for salaries and wages of the janitors and messengers empl oyed by petiti oner and the cleaning materials used in the client's premi ses should not be included in the computati on of gross receipts being direct costs w ithout a sin gle centavo f01min g as income of petitioner. Petitioner detail ed that out of the amount it bills to its clients, it receives a minimal amount of supervision and services fees equi va lent to not more than seven percent (7%) mark up which in turn goes to the salaries and wages of its administrative officers and employees. More than ninety-three percent (93 %) of the amount goes to the salaries and wages of the janitors and messengers and the cleanin g materials used. This Court di sagrees. It suffices to answer the ahove contention by refeiTing to the explicit definiti on of the law. As earli er noted. gross sales or receipts include the total receipts wi thout deductions. The sampl e contracts5 attached to the instant Petition shows that the contract price/service fee bill ed by petitioner to its clients is the total amount it receives although such amount includes the cleaning materials, and the salari es and wages of the janitors and messengers assigned to a specific client. In corro borati on hereto, a portion of one of the contracts entered into by petitioner is quoted as follows: 5 Annex " K " , "L", and " M "

C.T.A. A.C. No. 40 DEC ISION PAGE9 For and in consideration of th e .ianitorial services to be rendered by the SERVICE AGENCY to the client, the latter shall pay the SERVICE AGENCY the sum of TEN THOUSAND SEVEN HUNDRED SIXTEEN AND 59/100 (P10,716.58) PESOS, pe�� month for each janitor on the basis of six (6) working days a week including legal and holidays specified in the Labor Code of the Philippines which amount wi ll cover the daily wage, 131h month pay, fi ve (5) days incentive leave, emp loyer' s contribution for SSS, Med.icare, employees' compensation and Pag-lbig as provided by the said labor Code. xxx(Emphasis supplied) Logically, petitioner's gross sales or receipts is the contract price/service fee received from clients despite the fact that such amount includes the salaries and wages of the janitors and messengers as well as the amount of cleaning materials used or that petitioner derived no income therefrom . Lon g established is the rule that if a statute is clear, plain and free from ambiguity, it must be given literal meaning and applied without attempted interpretation 6. Hence, court may not engraft into the law qualifications not contemplated, and a meaning that does not appear nor is intended or reflected in the very lan guage of the statute, cannot be placed therein hy construction7. With respect to the second ground . petitioner contends that its business operations are not only in respondents' jurisdiction. Jts clients are mostly scattered within Metro Manila and some are even scattered nationwide and it would not be fair for respondents to collect tax on payments received from clients outside of Makati. In order to show that only 197 of its employed personnel are working or assigned to clients located in the City of Makati and all others are scattered and assigned to clients holding office outside the said city, petitioner attached its list of personnel and three contracts of petitioner with clients outside of Makati. 6 De Jesus vs. COA; G.R. No. 149154, June 10,2003 7 Statutory Construction by Ruben Agpalo; Fifth Edition, 2003 , pages 62 and 63

C.T.A. A.C. No. 40 D EC lSI ON PAGE 10 Respondents, however, disagrees to petitioner' s contentions and argues that such claim is absurd since petitioner cannot at least show that it paid taxes in favor of a Local Government Unit outside Makati City for sa id services rendered for a fee. Again, petitioner's theory is unaccept abl e. Pertinent hereto is Section 150 of the Local Government Code of 1991 which clearly provides for the situs of the contractor's ta x and is set forth below: "SEC. 150. Situs of the Tax . - (a) For purposes of collection of the taxes under Section 143 of this Code, manufacturers, assemblers, repackers, brewers, distillers, rectifiers and compounders of liquor xxx contractors, banks and other financial institutions, and other business, maintaining or operating branch or sales outlet el sewhere shall records the sa le in the branch or sales outlet making the sale or transaction, and the tax thereon shall acc rue and shall be paid to the municipality where such branch or sa les outlet is located. In cases where there is no such branch or sales outlet in the city or municipality where the sale or transaction is made, the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality."(Emphasis supplied) It was clear from the records that petitioner has no sales outlet or branch in any city or municipality other than Makati . For that reason, the last paragraph of the above-quoted provision is applicable, that is. ta xes due on petitioner's transactions in cities or muni cipalities where it has no branches or sa les outlet shall be recorded in its principal place of business and all taxes clue thereon shall be paid to the city or municipality where its principal place of business is located. Considering that petitioner' s principal place of business is in Makati, then, the taxes due on transactions with clients outside ofMakati, still, has to be paid in Makati. On the ground that the issuance of the Notice of Assessment was a patent viol ation of its ri ght to due process of law, petitioner maintains that due process and equity demand that assessments for alleged deficienc ies should be duly supported by

C.T.A. A.C. No . 40 DECISION PAGE 11 legal bases. Mere statement of the fi gures is not suffic ient. The legal provisions applied should be clearly stated for the validity of the assessment. Petitioner claims that it was not given the chance to controvert the findings of the examiner prior to the issuance of the table assessment without legal and factual bases. Hence the assessment should be considered null and void for failure to state the factual and legal basis. Contrarily, a careful scrutiny of th e Notice of Assessment and the worksheet attached thereto shows that due process was sati sfied. Por easy reference, the Notice of Assessment and the attached worksheet is reproduced below: "NOTICE OF ASSESSMENT Sir/Madam : The result of the examination under Letter of Authority LA- 2006 Nos. 001 conducted pursuant to Section 171 of the Local Government Code of 1991, reveals that you are liable to pay the correct city business taxes, fees and charges, reassessed or computed as follows : Deficiency Taxes, Fees and Charges - =P= 2.415.509.42 (Covering Taxable Period : 2003-2005 ) which you may further verify from th e attached assessment worksheet prepared and reassessed by ,FELl TO A. MANRIQUE Revenue Examiner/Deputy who conducted the examination. The above mentioned assessment shall become final and executory within sixty (60) days from receipt hereof, unless a tax protest is filed assailing its validity or propri ety as the case maybe, we rem am Very trul y yours, Nelia A. Barlis OT C, Ci ty Treasurer"

C.T.A. A.C . N o. 40 DEC ISION PAGE 12 INCO M E TA X 2% MONTHLY l'i\ 11) INTEREST Per 2 ~ 0fr. TOTAL RATE AMOUNT TAX DUE Yea r PARTICULA I!S AUD ITED DEFIC IEN CY Surrc ha rge (C REDIT) 2003 SE R VICE F/S DECLA RED DUE (O ve rp ay ru f' nt ) CONTR ATOR Mayo r' Penn i! 57,2 1R,48600 5, 00 0,00 0 .00 353 ,638.65 29,500 .00 324 , 138.65 8 1,034 .66 72% 233,379.83 638,553 .14 4 ,000 .00 4,000 .00 SERV ICE 5,000,000 .00 546,26 1.16 ��- 516,76 1. 16 129, 190.29 52% 268,7 15.80 9 14,667 .25 CO NTR ACTOR 82,90 1.48R .OO 4.000.00 2004 Mayor's Permit 29.500 .00 4,000 00 -- SERVICE 90,7 15,4 12.00 5,000,000 .00 60~ . 865 . 59 4 1,277 .99 563,587 .60 140,896 .90 28% 157,804 .53 862,289 .03 CONTRACTOR 4 ,00 0 .00 2005 Mayor's Permit oo ~.o oo M!!M81Al 351 121 85 652 200 16 2 415 502 42 NOTE : F/S endin g January 3 1 Section 195 of the Local Government Code of 199 1 mandates that when the local treasurer or hi s dul y authori zed representati ve fi nds that correct taxes, fee, or charges have not been paid, he shall issue a notice of assessment stating the nature of tax, fe e, or charge, the amount of deficiency, the surcharges, interests and penalties. This secti on is akin to Section 228 of the 1997 National Internal Revenue Code in as much that the underlying reason for both provisions is the basic constitutional mandate that no person shall be deprived ofhis property without due process oflaw. The essence of due process is the opportunity to be heard or as applied in this case, the opportunity to argue one's claim and one' s defenses. Due process does not require that the Notice of Assessment is full y deta il ed. What matters most is for the taxpayer to be info rmed of the assessment in such a way that it can present his case. Respondents' N otice of Assessment is not a mere statement of figures. Rather it informed petitioner that the assessment was fo r business tax, and the amount thereof. Actually, the attached worksheet contains a more detailed information on the

C.T.A. A.C. No. 40 DECISION PAGE 13 assessment showing specifics, such as; the nature of the tax being collected, tax base, tax due, deficiency or overpayment, surcharges, interests due, and the total tax due. Clearly, there was prima .facie com pliance with the requirements of Section 195 of the Local Government Code of 1991. Petitioner was not left in confusion as to the legal and factual basis of the assessment. Pmiher, petitioner' s statement that the Noti ce of Assessment is invalid for fai lure to state the applicable legal provisions is misplaced. Well worth noting at this point is the pronouncement of the Supreme Court in the case of Yamane vs. BA Lepanto Condominium Corporation8, to wit: " Ostensib ly, the notice of assessment, which stands as the first instance the taxpayer is officially made aware of the pending tax liability, should be sufficiently informative to app ri se the taxpayer the l e~al basis of the tax. Secti on 195 of th e Local Government Code does not go as far as to expressly require that the notice of assessment specifically cite the provision of the ordinance involved but it does require that it state the nature of the tax, fe e or charge, the amount of deficiency, surcharges, interests and penalties." (Emphasis supplied) From the clear language of the ruling above, Section 195 does not expressly require th at the Notice must specifically cite the provi sion of the ordinance; but requires that it state, among others, the nature of the tax . As already discussed, although the Notice itself merely states that the assessment was for business tax, the same was sufficie ntly explained by the attached worksheet when it supplemented under the heading Particulars that petitioner is being taxed as Service Contractor. Hence, petitioner is substantially informed of the lega l basis of the assessment, that it is being taxed in accordance with SEC. 3A.02 of th e Makati Revenue Code. Plausibly, there was no denial of due process. 8 G.R. No. I54993, October 25, 2005

C.T.A. A.C. No. 40 DEC lSION PAGE 14 Finally, petitioner asserts that the taxing and other revenue-raising p,o,;.wers of .s local govemment should be governed by the following principle, amon~~ others: t Taxes, fees, charges and other impositions shall (a) be equitable and based far as practicabl e on the taxpayer's ability to pay; (b) be levied and collected o~ly foryublic purpose; (c) not be unjust, excessive, oppressive or confiscatory; and (d) not be contrary to law, public policy, national economi c policy, or in restraint of trade. The taxes, charges and fees, which may be imposed by respondents should be guided by these principles and must not be unjust, excessive. oppressive or confiscatory and not in restraint of trade. More importantly, it should be based on the taxpayer's ability to pay . In view thereof, the assessment which was not supported by legal and factual bases should be cancelled and withdrawn Respondents counters that the subj ect assessments are not opprt-'tlv.y and confiscatory. It never deviated from its mand ate by law. The demand for deficiency taxes was simply that petitioner was found to have und erstated its gross sales or receipts as reflected in the Official Receipts of the Mayor's/business permits for the taxabl e yea rs covered and as also supported by the figures found in its own Financial .' Statements; hence, the subj ect assessment. It appears that petitioner ts challenging the assess ment as excessive and confiscatory for being without factual and lega l basis. This brings to fore the presumpti on in favor of the correctness of assessments . Tn the same wise, it is said that even an assessment based on estimate is prima facie valid and lawful where it does not appear to have been arrived at arhitrari/y or capriciously. The burden of proof is upon the complaining party to show c!earfy that the assessment is erroneous. Failure to present proof of error in the assessment willjusttfy the judicial affirmance ofsaid assessment 9 Marcos II vs. Court of Appeals, G.R. No. 120880, Jun e 5, 1997

C.T.A. A.C. No. 40 D EC ISION PAGE 15 The amount being assessed against petitioner is the result of the differences of its gross sales or receipts per financial statements compared to what it declared in the Mayor's Permit. In the absence of cont radi cti ng evidence, such assessment is presumed correct. The burden to prove, otherwise. li es upon petitioner which in this case. petitioner fa il ed to di scharge. The record s lay hare of any evidence that would prove that the assessment of responden ts is in deed excessive and confiscatory except from the allegati ons of petitioner. WHEREFORE, findin g no reversible error in the assailed Decision promulgated on November 3, 2006 and th e Ord er da ted Jul y 10, 2007, the instant Petiti on fo r Review is hereby DISMISSED for lack of merit. SO ORDERED. L~- cL~ ERNESTO D.~(~~A Presiding Justice ---.---f_E_1L-Jl.-B UTISTA CAESAR A. CASANOVA ssociate Justice Associ ate Justice CERTTFTCATIO N Pursuant to Section 13, Ar1i cle VTTl of the Constitution, it is hereby certified that the conclusions in the above Deci sion were reached in consultation before the case was ass igned to the writer of the opini on of the Cou rt 's Di vision. Court ofTax Appeals Library ~- lR~ Q~ ERNESTO D. ACOSTA Presiding Justice